If you are an oil & gas investor, chances are you are owed money on some of your mineral interests or royalties. In this blog series we’re examining the top 5 ways you could be getting underpaid, so be sure to read our recent articles on incorrect decimal calculation and funds in suspense.
Unlike the other ways oil & gas investors can get shortchanged by producers, the next type of underpayment on our list involves interest owners, in essence, cutting a check to the operator.
Investors often share the revenue as well as the costs of operating a well through post-production deductions and a variety of tax obligations. In some states, royalty calculation is subject to mandatory deductions from marketable product rules that burden lease holders with multiple postproduction costs. But depending on the type of interest you own and the terms of a lease, you might be exempt from paying such fees, but the operator charges you anyway through revenue deductions or even adjusting realized prices.
While there are multiple causes behind improper deductions, most occur because a lease is misinterpreted or because the revenue deck was created using a standard, one-size-fits-all lease.
Risk to Investors
When a producer unintentionally deducts post-production expenses on a no-cost lease, investors can lose as much as 25% of their revenue. In some rare cases improper deductions can result in negative royalties.
Mistakes like this can hit the bottom line especially hard where marketable product rules apply and for wet gas wells, where ethane and other NGLs are subject to “market enhancement” deductions, i.e., those costs associated with bringing unusable raw products to market. These can add up and include compression, separation, dehydration, storage, marketing, CO2 reduction, and transportation fees.
To nip improper deductions in the bud, ensure you are linking each of your revenue statements to the lease records that govern your post-production expense obligations. Purpose-built mineral management solutions can greatly simplify the tasks of putting your land and accounting data in context with each other.
Secondly, post-production fees may not always be itemized as direct revenue deductions on check stubs, instead manifesting as adjustments to realized pricing. To spot these deductions, be sure to compare realized pricing to local benchmark pricing for oil, gas, and NGL.