In a crowded room of mineral owners, if someone mentions the word “underpayment” everyone is likely to turn to the only operator in the room. It’s easy to assume that oil & gas operating companies are the culprit when it comes to incorrect and non-payment on mineral interests, but let’s clear the air right off the bat. The oil & gas business is complex with labyrinthine ownership structures and cumbersome production accounting. Operators are obliged to not only manage the tough tasks of finding and extracting oil and gas, they must also manage payments and expectations of thousands of interest owners. Things fall through the cracks and with a few exceptional cases of misconduct, underpayments are a result of a complicated system stressed to the max. And it’s important to note that most operators are also non-op interest owners, putting them in the same boat as the rest of us.
In this blog series, we’re going to take a deep dive into the top 5 underpayments oil & gas investors struggle with every day and why operators and non-ops can both benefit from the insight we’ll provide. First on our list is an underpayment you may not even be missing until you look hard enough.
Right now, there is a chance you are not in-pay on wells you didn’t know existed. You have a right to receive income from such wells but for many reasons the operating company isn’t sending the check.
Funds that are held in suspense can occur through title defects or change in purchaser. In some states, operators are not obligated to pay royalties without a signed division order. The operator might also be holding funds in suspense due to simple record keeping errors, such as a missing W9 form. And the checks may have been in the mail but sent to an incorrect address.
Risk to Investors
Let’s assume a new well produced 100,000 barrels of oil in the first six months at $60/bbl. You have a 1% interest in the well that is not being paid on. During this period $60,000 is held in suspense by the operator.
While this money could eventually make its way to your bank account through an audit on either side, significant risks of a total loss exist. Funds might revert to the state after a statutory waiting period. Many states don’t require producers to hold suspended funds in an escrow account, so there is also a chance that funds could be locked-up or lost if the operator files bankruptcy.
Avoiding the risk of losing or delaying payments from missing wells is all about staying tuned-in to what’s happening around your properties. Key to this is the ability to quickly map and monitor nearby permitting and rig activity. If you spot a new well going in on one of your tracts, you can be proactive rather than relying on the operator to track you down.