Replies to This Discussion

Permalink Reply by North LA on February 12, 2012 at 6:06

Virginia,

 

A lawyer would be the best person to ask but I will tell you what I know. The answer is it depends on what your lease contract says and on the production from the well. The boilerplate lease contract for SWN is for the mineral owner to receive royalties once the well is paid for. In other words, if you have the standard contract then you won't get paid until all the well's $10million expenses are paid which means it could be as long as a year ,if ever, before you get any royalties. If you don't have the standard lease then the time frame could be different. Again, if  you want a definitive answer you have to read your lease and then discuss with an oil and gas attorney.  

Permalink Reply by Skip Peel - Mineral Consultant on February 12, 2012 at 7:11

 The operator can not wait until the well pays out to pay lessors.  Royalties are due from first production for lessors.  There is an unknowable time lag between beginning of production and mailing of royalty checks depending on Division Order title reviews and pay decks. 

Permalink Reply by VirginiaDore on February 12, 2012 at 7:15

Skip,

 

So you're saying North is incorrect?  Good news if so.  I have a lot to learn and appreciate all the help.

Permalink Reply by North LA on February 12, 2012 at 7:21

I hope you're right skip. I've read a couple of Pine Belt's leases and language made it sound like they had to pay off the well before they paid any royalty. I'll take your answer any day over what I thought I read.

Permalink Reply by obed w odom on February 12, 2012 at 7:33

Your description sounds like what would occur for an unleased mineral owner, who receives no money until all well expenses have been paid. I have never seen or heard of a lease stipulating these terms. Some leases do allow some marketing expenses to be deducted, but never as far as I know can drilling and completion expenses be deducted from royalty payments.

Permalink Reply by Cal Carter on February 12, 2012 at 8:47

I think Obed is correct.

It is in the States best interest to see the resources developed and also have no waste committed.

In situations where the mineral right owner does not want to lease the rights, the developer can still get permits to develop and the mineral right owner who refused to participate has to pay a premium in recovery of the developer cost from a fixed royalty rate paid by said developer.  Said owner gets no royalties until developer recovers all costs first.  However, those that lease royalties to the developer get their agreed upon share of royalties as soon as possible following the well going into production and does not pay any of the development cost. 

I was having some trouble understanding some of this and the MS OGB Rule book was quite helpful in getting my mind wrapped around a few things.  While your State rules are likely different, I would venture to bet that most concepts are pretty closely related and reading this may benefit you in better "talking the talk" and somewhat knowing a little more about what you are talking about.  http://www.ogb.state.ms.us/docs/MSOGB_Rulebook_20111214.pdf

Might be a good idea for someone to post links to the various State Boards and their Rule Books in a seperate thread.

Permalink Reply by Bill Hill on February 12, 2012 at 10:17

I've encountered this before on royalty payments a few years back and its covered by the following Arkansas Statutes:

ARKANSAS

§15-74-601. Time Limits Governing Oil and Gas Payments. (formerly 53-525)

§15-74-602. Fraudulently Withholding Payments.

§15-74-603. Action for Non-Payment of Proceeds.

§15-74-604. Failure to Pay Royalties.

Interest rate - Marketable title: 12%, unless contract provides greater; if payment is

suspensed in bad faith, Court may increase up to 14%,

plus reasonable attorney’s fees.

Interest rate - Unmarketable Title: None

Payment Due - First Sales: 6 months after the date of sales

After First Sales - Oil: 60 days after end of calendar month of sales

After First Sales - Gas: 60 days after end of calendar month of sales

Optional: Annually if the amount is less than $25.00

Notice Requirements: Yes; 30 days to respond

Escrow Provision: None

History: Acts 1981, No. 269, §1; 1983, No. 448, §1; A.S.A.

1947 §53-525

Permalink Reply by VirginiaDore on February 12, 2012 at 7:08

North,

 

Many thanks, and I see exactly what you mean.  Worst case scenario, I guess this also means the lease could be "held by production" at its expiration even though no royalties whatsoever had changed hands?

 

Permalink Reply by John Brewster on February 12, 2012 at 12:37

Please let me take a crack at clarifying.  As Skip opined, the lessee must pay royalty on the first barrel produced and sold commercially.  I assume you are in Arkansas?  If so, Mr. Hill sent some helpful information, but it may be a little confusing (marketable/non-marketable title).

States vary as to the time, but a lessee has some extra time to make the first royalty payment.  According to Mr. Hill, that is six months in Arkansas.  I haven't checked that, but he could be right.  Once a well is determined to be capable of commercial production, the operator hires a lawyer to write a division order title opinion (listing all the owners based on courthouse records).  That is the definitive data.  Sometimes a mineral owner executed a lease but that mineral owner did not have clear record title.  An example would be where an older deed sold all the minerals to someone else, or a poorly worded conveyance created legal questions about who the owner is.  That would be a situation where the delay in payment was due to a legitimate title question.

So, the lessee has a fixed time period in which to distribute royalty payments after production begins.  That is extra time to get all the title work done.  If that first time limit is exceeded, or if the first payment is within the time limit but subsequent royalty payments are late, the lessor is entitled to be paid interest on the amount owed that is overdue.  Beware: They don't pay this voluntarily; you must write to ask for interest.  I watch my checks all the time.  They always state the production month.  If you ever see that you are being paid for production three months ago or longer (in Arkansas - payments must be within 60 days after the end of the month), write the company sending you the check - in the letter, reference your "owner number" shown on the check and the date and check number.  Simply state in the letter that it appears some of your royalty was paid late, and ask that they send you statutory interest.  I always ask that they send their calculation as well.  Now, I don't ask for interest when small amounts are involved.  If the amount of my royalty that appears to be late is less than $100 and/or the time the payment is late is less than three months, I don't consider it worth everyone's time to ask for interest that would be just a few dollars.  Use your judgment, but that is my view.

Finally, most states require the operator/lessee/first purchaser to pay interest at one rate if they are simply late without any apparent reason, but a lower rate if they are late due to title questions (non-marketable title).  Mr. Hill's research suggests that in Arkansas, late payments earn you 12% interest, but no interest if there is a legitimate title issue.  Again, I haven't personally verified that and encourage you to do so.  In Texas and Oklahoma, you do get interest in both situations - more if they simply screw up than if they have a title issue. 

If you ever ask for interest, I suggest you follow the language I use - don't try to specify what they owe you - just say it appears that some of the royalty paid in the check was not timely and ask for statutory interest (and a copy of their calculation).  Let them do the work.  Last thing, keep a copy of your letter.  If you haven't received an interest check or some response within 60 days, call or write again.

I hope this helps.  As for your question about a lease that is "held by production" ("HBP"), I doubt that status would ever be achieved if no royalty is ever paid.  I can imagine some complicated situations in which it could happen, but it never does.  The operator can't determine whether a well is commercial until it produces.  If that production is sold even if it is production during testing, you earn royalty.  The lease provides that it can also be maintained by payment of a shut-in royalty (same effect as HBP).  I only mention this because gas prices are so low, don't be surprised if you start getting those.  The oil companies don't want to sell their gas this cheap, and their wells are not economic at these prices.  Paying a shut-in royalty (generally one-time holds it for up to a year), allows the company to retain its valuable asset (a commercial well/lease).  Conceivably, one could receive the initial royalty payment (when the well is tested initally or produced only one month), then a shut-in payment.  I doubt that will ever happen but it is possible. 

Got it?  Questions?

 

Permalink Reply by VirginiaDore on February 12, 2012 at 15:16

John,

Thank you for your very thoughtful and comprehensive response.  I greatly appreciate the time and thought you (and others) have devoted to my questions and will retain all the info for future reference, rest assured.  It would appear that if Roberson is beginning to produce oil commercially about now, as seems to be the case, then royalties should begin by or before late summer, given the 6-month initial time limit.  Actually I believe SWN began to flare metered gas, on which royalties were to be paid, in late December or early January, so perhaps checks should start in a small way even before then.  Do those seem like reasonable inferences, or am I misunderstanding something?  I am absolutely a neophyte at this, having inherited mineral rights in Columbia County from my father nearly 22 years ago, with very little commercial activity having occurred in the interim.  Those circumstances plus distance from the Oil Patch (I'm a Little Rock native but have lived in Virginia those 22 years and more) make it hard to keep up with and interpret what's going on.  This website and you who are kind enough to post on it are a godsend!

Permalink Reply by John Brewster on February 12, 2012 at 15:22

We can't say as a certainty that SWN will pay royalty on flared gas.  Generally royalty is only paid when hydrocarbons are sold commercially.  Accordingly, I can't predict when you should expect a check, but I know SWN well and they will pay you promptly unless there is a title issue (considering their need to confirm title and arrange to sell the production - which may involve building pipelines, etc.) . 

Permalink Reply by VirginiaDore on February 12, 2012 at 16:02

The Arkansas Oil and Gas Commission ordered royalties in the permit to flare ("the natural gas and commercially valuable liquids from the well shall be metered to determine the amount flared and produced, and the royalty owners shall be paid the appropriate royalty").

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