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.