Some landowners consider royalty audit

  • January 17, 2020

Originally published in Forests & People Magazine in December, 2019

BY: DAVID SMITH
Business Development Officer, Argent Mineral Management
(318) 251-5854

David Smith

You’ve got some oil and gas “mailbox money” coming in every month, and you’re thankful to have it, but could it — rather, should it — be more?

This concern has frustrated many mineral owners for years and over the past decade. With the discovery of shale oil and gas, many are finding that they might not being paid correctly for a variety of reasons.

Are landowners being paid correctly? If there is a problem, can it be fixed?

Frequently, errors are discovered that affect income and they might have been occurring for some time. In most cases, the recipients simply had no way of knowing. That’s why the best way to address these errors usually is to conduct a royalty audit.

A royalty audit is simply a review of past royalty payments for verification that the person or entity has received the full benefit of their royalty interest(s). Each state has a specific time frame during which recipients can go back and recoup unpaid or underpaid royalties.

For example, in Louisiana, recipients can only go back three years from the current date of production. Texas recipients, however, are allowed to go back four years. In North Dakota, payments can be audited going back six years.

Here is a brief overview of some other royalty audit considerations:

Issues

Issues can arise in a royalty audit for a variety of reasons. Over the past decade or so, there have been many industry factors that have contributed to errors in payment: increased competition for operations in various oil and gas plays; increased knowledge by royalty owners (pushing for better lease language); reduced commodity prices creating tighter margins for operators; and bankruptcies/buyouts/mergers that create confusion among the parties responsible for paying.

Some of the most common types of issues that you will find include:

  • Volumes: Operators do not make payment for the full quantity of the product that was produced/sold.
  • Deductions: Expenses charged to your royalties in excess of what is allowed by the language of your lease.
  • Severance Taxes: Depending on the type of well that is drilled and where it is located, royalty owners may be exempt from severance taxes completely or be entitled to a reduced severance rate.
  • Pricing: Operators may pay a reduced price due to factoring in deductions or may not be receiving a fair price in their sales.
  • Nonpayment: Operators may fail to set up royalty owners on a new producing well, resulting in no payment for production.
Time

The audit process can take a substantial amount of time, as it usually involves reviewing hundreds of pages of check detail and communicating with multiple operators.

A typical royalty audit usually takes four to six months from start to completion; however, it can take much longer. This depends on several factors:

  • The number of operators being audited
  • The number of wells being audited
  • The number of products being audited (oil, gas, NGL, etc.)
  • The number of issues identified
  • Operator response time to inquiries

When deciding whom to hire, considerations should include qualifications, what kinds of operators the company has audited and across different states, cost, what sort of software, if any, is used to increase efficiency and accuracy of the audit and company references.

Sometimes, seven out of 10 audited mineral owners have turned up instances of incorrect payments. Mineral owners making $100,000 or more should probably consider a royalty audit, if for no other reason than peace of mind.

David C. Smith is a business development officer for Argent Mineral Management, a subsidiary of Argent Financial Group, in Ruston.