Every month, royalty owners around the country receive oil and gas royalty statements, which can sometimes be new and perplexing. Severance tax, BTU factor, decimal interest, API number, and other industry-specific terms can be a little foggy.
We’ll get you comfortable reading your oil and gas royalty statement with this post.
How to Interpret Your Oil and Gas Royalty Statement
Royalty statements may appear confusing at first glance, but with a little help, they’re not that tough to understand. It’s not that bad after you understand a few crucial pieces of information, such as how to read royalty statements.
#1. Basics of a Royalty Statement
Royalty statements are fundamental accounting documents that are mailed to royalty rights holders regularly. Royalty declarations are frequently the only link between a mineral owner and an oil company. The terms oil firm and operator can be used interchangeably in this article. Revenue checks are occasionally sent by the First Purchaser. When the amount owed to the royalty owner is minor, revenue distributors are only required to mail a check when the amount reaches a certain level.
For royalty statements, there is no standard format. There are, however, a few essential data items that are (or should be) included in all assertions. For preparing royalty statements, reputable revenue distributors are almost always guided by excellent accounting procedures and are frequently affected by state government legislation.
When viewing your statement, gross values are normally shown on the left side of the page, while net values are shown on the right. The subheadings below indicate elements you will most likely encounter on your royalty statement.
#2. Creating a Property Identification
There will be identification numbers, codes, tracked numbers, lease names, well names, county and state names, or some combination of these for each producing property, all of which serve simply to identify the producing entity. Owners are frequently interested in many properties, each of which should be identified on the statement.
#3. Product Number
This column shows which product you are getting compensated for. Crude oil, natural gas, condensate, and plant products such as NGLs, sulfur, CO2, and so on are all possibilities. Because each of these is priced separately, each product will be displayed as a separate line item. The product name may be spelled out or designated by a code # or letter, with a legend at the bottom of the page.
#4. Month of Production
This column displays the month and year in which the product for which you are being paid was generated from the well (s). Oil is frequently paid two months in advance, whereas natural gas (and products) is typically paid three months in advance. Oil and gas royalties are paid monthly, following the producer’s normal accounting cycle, unless the obligation does not reach the state’s minimum check requirement. These are known as aggregate pay laws, and they are commonly set at $25 or $100. If your interest is really low, you will be paid at least once a year.
#5. Price of Oil and Gas
This is the price per unit, paid in dollars and cents, used to generate your cheque. Oil is priced in dollars per barrel, natural gas in dollars per cubic foot, and plant products (NGLs) in dollars per gallon. Over the last 15 years or more, the marketing and pricing of oil and gas have shifted away from traditional set pricing for longer terms and toward a 30-day pricing model. Natural gas deregulation, combined with the expansion of a highly liquid oil and gas futures market, has pushed the industry in this direction.
Type of Royalty Interest
Only two sorts of interests will be discussed in this article: the royalty interest (RI) and the Overriding Royalty Interest (ORRI), also known as an override. You’re probably aware of which you own. The royalty interest arises from and through mineral ownership, whereas the override arises from or is carved out of the oil and gas lease itself. In terms of the revenue statement, both will be treated the same.
Quantity
This is the amount of product produced during the specified month, measured in the relevant unit of measurement. Each month, it will be different (err… downward). Practically every well begins its journey on a downward sloping decline curve from the first day of production.
Total Cost
This is the volume of product produced multiplied by the price got during the month of production listed.
API Well Identifier
The API number is a one-of-a-kind identifier for oil and gas wells. These numbers can have up to 14 digits. The initial digits of an API number show a well’s precise geographical location, while the last digits record the well’s operations. From left to right, the numbers begin with a two-digit state code, then a three-digit county code, and finally a five-digit unique, well-identifying number. The sidetrack codes are represented by the 11th and 12th digits. 00 is usually the original well. The 13th and 14th numerals denote different drilling operations.
Interest in Decimal Form
This figure expresses your ownership interest as a decimal, usually to the eighth decimal point. The amount of production because of you is calculated by multiplying this decimal interest by the gross quantity produced. This decimal is determined by the following factors: the size of your land tract, your mineral interest percentage, your lease royalty fraction, and the size of the producing unit.
Taxes
How shall I tax thee? Allow me to count the ways. Severance tax, conservation tax, oil field cleaning tax, and emergency fund tax are all options for each state’s oil and gas tax structure. Each state uses a different technique, but regardless of how it is calculated, the overall take is usually in the 5-8% area. The severance tax is typically the most significant tax, with minor taxes frequently directed toward environmental remediation efforts. Many states provide tax benefits based on variables such as stripper wells, enhanced oil recovery wells, or reactivated wells.
Deductions from Royalty Statements
Why are there charges in my royalties statement? This is a common question. Making the product marketable is the challenge at hand. Crude oil and natural gas are rarely of sufficient quality to be marketed for immediate consumption when they are generated in their raw form. That is why you may see marketing deductions. According to the principle, the product has no worth until it is made marketable.
You may notice the following line of items on your royalty check stubs:
- A Compression deduction is a fee for compressing gas to a high enough pressure to enter a gathering or transportation pipeline.
- Dehydration deduction – a fee for gas dehydration, which means removing water vapour from natural gas.
- Gathering deduction – a charge for gathering a product’s pipeline to a central sales point.
- Processing deduction – a charge for expenses incurred during the refinement of high BTU natural gas.
- A Treating deduction is a charge for eliminating contaminants from a hydrocarbon stream, such as co2, nitrogen, or hydrogen sulfide.
Final Words
Businesses and organizations pay royalties to owners for the use of their creative works, as well as compensation for intellectual property or ownership interests, such as mineral rights. Users must pay royalties under a legal license agreement. A royalty payment received by licensees is considered royalty income and is subject to ordinary income taxation in the United States.
Pheasant Energy wants you to be an educated oil and gas mineral and royalty owner. Give us a call even if you only need someone to answer your inquiries. We eagerly await your response.
