Helpful Tips for Successful Royalty Management

By Davis Powell and Daniel Simpson

with SHALETRAK ONLINE Royalty Management Software

www.shaletrakonline.com

ShaleTrak often works with owners who are new to the process of receiving revenue from oil and gas production.  Below are a few basic tips to help oil and gas royalty owners with the management process:

1. Division Orders and Interest Decimal Verification: One of the most important initial steps is verifying the company is paying you on an accurate decimal.  To verify this, you will need to take the net mineral acres you own in a producing unit, and divide it by the total number of acres in that unit.  Then take that number and multiply it by the royalty fraction or percentage provided for in your lease. 

It is helpful to have a unit survey plat from the operator of the unit to see the exact amount of acreage they attribute to your tract as well as to the entire unit (because it may not be exactly the amount you think).  Also, once you receive a Division Order (“D.O.”) from your Lessee stating your interest decimal, it is helpful to know whether or not your state requires the signing of the D.O. for an owner to be paid. 

You will want to review the D.O. carefully to ensure it does not attempt to modify any of your lease terms.  Finally, even if you are not required to sign the D.O., you will want to ensure they have your address as well as your social security or Tax ID on file correctly.

2. Owner Relations Information:  Once you have been set up in the company’s payment system, you will be assigned an owner or payee number which should appear on each check’s statement.  Keep a record of your owner number and the royalty owner’s relations contact information for your Lessee or Operator.

3. Review your Royalty Check Monthly:  While some owners are immediately thinking about how to spend their royalty money, it is a good practice to take time and review the check each month for accuracy as soon as you receive it.   Here are just a few of the main items to look for each month:

  • Read over your interest decimal and confirm that it is accurate considering your mineral tract size, your unit size and your royalty rate.
  • Compare the volumes for each product reported on your check stub, with the volumes the company operating the well has reported to the State.  If the volumes are very far apart, review the check to ensure it is not due to another factor before contacting your Lessee to inquire about the issue.
  • Make note of the price the company uses to calculate your revenue.  While the price paid to royalty owners is a very in-depth topic, you want to generally know if the price you are being paid is within a reasonable range in accordance with your lease terms and the product’s quality (oil’s gravity and sulfur content, or gas’s BTU quality)
  • Review any deductions to ensure they are reasonable and are allowed under your lease’s specific terms.

4. Keeping up with Adjustments:  Some check statements may have revenue adjustments which affect previous months.  The list of these adjustments on your statement can be confusing, but it pays to keep an eye on any changes they make to a previous production month and to confirm the reason for the adjustment.

5. Document Errors Properly:  Many owners will eventually run across a payment error on your royalty.  Document the error carefully and double check your lease terms and interest calculation to make sure it is truly a mistake.  Provide all information to the company’s owner’s relations department with a request to reconcile.  If you are at the point where you are formally contacting the company by mail, send it certified and return receipt requested and hold on to those items so you may prove their receipt if needed. 

6. Filing System and Back Up: 

  • Your Lease:  We are always surprised by the number of owners who do not have a full copy of their own lease.  Sure, the landman left them with a copy, but it many cases it was just that - an unsigned copy.   It is important to keep a fully executed copy of each oil, gas and mineral lease that you sign.  In many states, companies have opted to file abbreviated forms of the Lease, sometimes called Memorandums of Lease, rather than the lease itself.   However, you should never rely on a Memorandum as your personal record of the lease.   If possible, keep a scanned copy of your lease in electronic form where it can be backed up with other files.
  • Royalty Statements: Even though your Lessee will gladly provide most of your recent statements online or by request, it is still good practice to keep a yearly file of all royalty statements.  Many owners we work with have begun saving each of their statements in PDF form on their computer or a cloud-based back up system.  This way you will always have the payment information you need to document any errors.

Please visit us at www.shaletrakonline.com to view how our online software application can assist with your oil and gas royalty management needs.

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Davis Powell and Daniel Simpson are the Principal Partners of ShaleTrakOnline.com a web-based oil and gas royalty management software specifically designed for royalty owners.  Learn more at www.shaletrakonline.com

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Comment by Sally Bell on February 26, 2015 at 3:58pm

We signed a lease in January, 2014, and company is saying they still haven't received a DO.  Consequently, we still haven't received royalties.  Is that typical?

Comment by J. D. on February 24, 2014 at 6:19am

Philip's comment is right, you have to be aware of the division order's effect and how your state addresses their effect.  Making sure the decimal is correct is very important.

Comment by Philip Brutz on February 20, 2014 at 5:59am

Oil and Gas Lease and Division Order Conflicts
By Kathleen Dotzel Knight, Attorney

"With the boom in natural gas wells, you can bet there will be as big a boom in oil and gas litigation. One area where increased litigation is expected is in disputes over the payment of royalties resulting from conflicts between the oil and gas lease and the division order. Because division orders are not issued until there is actual production, mineral owners and operators sometimes forget to address the particulars of division orders when negotiating a lease. This is a mistake.
Division orders are revocable contracts directing the distribution of proceeds from the sale of oil and gas. Using a title opinion as a basis, division orders set out the fraction of production each party is entitled to receive. Each interest owner will be asked to sign the division order before the first royalty check is issued. Sometimes the division order contains terms that are either not in the lease agreement or are different than the lease agreement and can be less favorable to the owner. The owner should carefully review a division order before signing it. If the owner signs the division order, it is a binding agreement and, while in effect, will take precedence over the lease.
If the owner refuses to sign the order, the operator may withhold royalties. In an attempt to avoid conflicts this situation creates, Texas passed a law that provides that a payee may be required to sign a division order as a condition to receiving payment if the payor 1) uses a form that contains only certain listed provisions or 2) uses the model division form set out in the statute.[ii] The producer cannot withhold royalty payment solely on the basis of an owner?s refusal to sign a division order that is not in compliance with this statute.[iii]
Although this law has provided some stability, open issues persist. While it states that a division order can never permanently amend or supplant a lease, case law exists that holds that the division order will control while in effect.[iv] Also, even though the law specifically states that any provision in the order that is contradictory to the lease is invalid to the extent of the contradiction, it then allows that the order may be used to ?clarify royalty settlement terms.?[v] So this leaves open to interpretation when something would be considered ?contradictory? vs. supplemental or clarifying.
The statute confuses things even more when it defines ?market value,? ?market price,? ?prevailing price in the field?or other such language when used as the basis of a valuation in the lease as "the amount realized at the mouth of the well by the seller of such production in an arms length transaction." The problem is that this definition is contra to Texas case law which consistently maintains that these terms are not the same. ?Proceeds? or ?amount realized? requires the royalty to be measured based on the amount actually received by lessee. By contrast a ?market value? or ?market price? clause bases royalties on the prevailing market price for gas irrespective of the actual sales price.[vi] So a division order, if interpreted in accordance with this statute, may well alter the valuation method agreed to in the lease.
Because of the ambiguity surrounding these issues, it would be wise to sort out these matters when negotiating the lease. At a minimum the lease should provide that 1) any division order issued will not change the royalty valuation method defined in the lease, and 2) that the signing of a division order that in any way alters the terms of the lease will not control nor temporarily amend the original lease.
If careful attention is given to setting out details of division orders at the lease drafting stage and the owner does a careful review of the division order before signing, these disputes can be avoided."

Here is the link to the National Association of Division Order Analysts Division Order Form:

http://www.nadoa.org/index-4.html

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