In this series of blog posts, we’re taking a close look at the top 5 ways investors are being underpaid. In the last Adding Up Underpayments blog, we broke down the root causes and risks from revenue held in suspense, so be sure to read the article here.
Next up is one of the most common reasons why you might be getting underpaid on your mineral interests.
Ever seen a chain of title? Required to lease land for oil & gas development, these instruments document mineral ownership from the original owner (almost always the state) who had 100% interest to the current owners. Over time mineral interests are divided and divided again as land is sold, inherited, or otherwise exchanged hands over decades. The result is that mineral interest is tracked to the eighth decimal place, so even a small miscalculation or dropped decimal place can impact your bottom line.
The biggest reason decimals are calculated incorrectly is simply human error. Landmen and title attorneys still rely on manual Excel calculations. And leases and other title documents can be misinterpreted. The situation is complicated further when an owner has multiple interests in the same well, which might be the same types of interest or a mix, such as owning both an overriding royalty interest and royalty interest. In the case of multiple interests, operators often miscalculate the ownership or miss an interest altogether.
Risk to Investors
Using the same scenario from our previous blog (in which a new well produced 100,000 barrels of oil in six months at $60) let’s assume you have an incorrect interest decimal in this well of 0.009 and an actual decimal of 0.01. That’s $6,000 you were underpaid.
Of equal concern is that investors can also receive overpayment on their wells. So, if the decimals were reversed in this scenario, you would owe the operator cash, who would have every right to claw it back.
Don’t assume your interest decimals are correct. Fortunately, there are purpose-built tools and online courthouse records that will empower you to maintain accurate land information and fill in gaps in your title documents so you can spot decimal problems faster. Then take action to correct and recover missing revenue.