Video · 7 minutes · captions on
How oil and gas royalties are calculated, barrel to check
Transcript
Intro
Say one barrel of Texas crude sells for seventy dollars. If you own minerals under that well, how much of that seventy dollars is yours? For a typical small owner, it might be about twenty-two cents. Which sounds terrible, until you multiply it by thousands of barrels, every single month. Today we'll follow one month of oil from the wellhead to your mailbox, and do the full math, out loud, with sample numbers. By the end, you'll be able to check your own royalty check, line by line. This is general information, not legal or tax advice.
The formula
Here's the whole thing in one line. Your payment equals the volume sold, times the price, times your decimal interest. Then subtract your share of severance tax, and any post-production deductions your lease allows. That's it. Every royalty check in Texas is some version of this line. And here's the good news. Every term can be checked. Let's take them one at a time, starting with the most mysterious one. Your decimal.
Your decimal
Your decimal interest is your slice of everything the well sells. It comes from three numbers. The royalty fraction in your lease, your net mineral acres, and the total acres in the well's unit. Say your lease gives a one-fifth royalty, you own ten net mineral acres, and the unit is six hundred forty acres. One fifth, times ten, divided by six forty, equals zero point zero zero three one two five. That tiny number should match the decimal on your division order, and on every check stub. If it ever changes, ask why. Older leases often carry one eighth. Newer ones commonly carry three sixteenths, one fifth, or one quarter. Your lease sets it.
Volume
Next, volume. How much the lease sold that month. Oil is measured in barrels. Gas in mcf, which means thousands of cubic feet. Here's the powerful part. Operators report every lease's production to the Texas Railroad Commission, every month, and it's public. So you can line up the barrels on your stub against what the state recorded for that same lease and that same month. In our sample, the lease sold twelve thousand barrels in March. And if the volume keeps falling, that's often just a normal well getting older. New horizontal wells decline fastest in their first years.
Price
Next, price. Oil is usually priced near that month's West Texas Intermediate average, minus a differential for quality and transportation. Gas is trickier. It's priced per mcf, or per MMBtu, and a gas line can include liquids taken out at the plant, like ethane and propane. In our sample, the oil sold for seventy dollars a barrel. If your price sits far below the month's benchmark, with no explanation, that's worth a question.
Gross value
Now put the first three together. Twelve thousand barrels, times seventy dollars, is eight hundred forty thousand dollars of oil. Now multiply by our decimal, zero point zero zero three one two five. That's two thousand six hundred twenty-five dollars. That's your gross share for the month.
Tax and deductions
Then come the subtractions. Texas severance tax is four point six percent of the market value of oil, and seven point five percent of gas. On our two thousand six hundred twenty-five dollars, that's one hundred twenty dollars and seventy-five cents. Gathering, compression, transportation and processing charges may come off too, but only as your lease allows. Some leases forbid them. Many oil lines show none. Gas lines are where deductions usually live. So the net on our sample stub is two thousand five hundred four dollars and twenty-five cents.
A gas line
Gas lines use the same idea, with a couple of extra steps. Gas is often sold by its heat content, in MMBtu, not just its volume. Say the lease sold thirty thousand mcf, at one point one MMBtu per mcf, for two dollars and fifty cents. That's eighty-two thousand five hundred dollars of gas. Times our decimal, that's a gross share of about two hundred fifty-seven dollars and eighty-one cents. Severance tax on gas is seven and a half percent of market value. About nineteen dollars here. Then gathering and compression charges, if your lease allows them. In this sample, thirty-seven fifty. So about two hundred one dollars reaches you. On gas lines, read your lease's deductions clause, because that's where the biggest differences hide. Even when the math is right, a stub can look strange. A company can combine several months, or several wells, on one line. Some lines are adjustments that correct an earlier month, up or down. Small balances may be held and paid once a year. And if your decimal changes from one stub to the next, that's worth a written question every time.
When it's due
And when should it arrive? Texas law says the first payment from a new well is due within one hundred twenty days after the end of the month of first sale. After that, unless your lease says otherwise, oil is due within sixty days after the end of the month it was sold, and gas within ninety days. If a payment is late without a lawful reason, interest is owed at two percentage points above the New York Federal Reserve's lending rate, unless a written agreement sets a different rate. And if you're owed a hundred dollars or less in total, the company may pay once a year instead of every month.
Check your own stub
So here's how to check your own check, in three moves. First, find the lease and the production month, look up the same month in the state's record, and compare the volume. Second, compare the price with that month's benchmark. Third, multiply the gross value by your decimal, and see if the math holds. If a deduction isn't explained, Texas law lets you ask. Send a request by certified mail, and the company has sixty days to explain it, also by certified mail. Royalty Clerk's free royalty calculator runs these numbers for you, and its lease lookup shows the state's record for your lease.
Free tools
Volume, times price, times decimal, minus tax and allowed deductions. Now you know what every number on your check means. Try the free calculator at royaltyclerk.com, and share this with someone who's never understood their stub. Thanks for watching.
Sample numbers, families and documents are illustrations, not real owners. General information, not legal, tax or investment advice.