The extreme swings in oil prices during the past few months serves as a perfect reminder that it is best not to “go it alone” when investing in oil and gas properties. A panicked decision to sell mineral assets when oil prices plunged toward negative $40 per barrel (which happened on April 20) may have resulted in a significant negative financial impact.
Challenges abound in owning and managing oil and gas investments, but the industry
remains the foundation of the Texas economy. Tax receipts (state and local) and state royalties from individuals, families and oil and gas companies generate $16 billion in annual revenue. There are an estimated 12.5 million mineral owners in the U.S. – and 2.5 million of them live in the Lone Star state, according to the Texas Independent Producers & Royalty Owners Association, a trade organization that represents nearly 3,000 individuals and companies.
For landowners who lack experience in the energy industry, investing in oil and gas assets is not the kind of project where you bring in a friend-of-a-friend for help. Here’s why partnering with a proven mineral management company can pay dividends down the road:
- You are represented by experts who have extensive experience working for oil and gas E&P companies. These professionals know how to negotiate royalty contracts.
- You have access to team members who specialize – or can put clients in touch with – experts in finance/accounting, tax, federal/state/local regulations (including environmental law).
The complexity of managing oil and gas properties requires technical skills that few people possess. Environmental law, accounting and lease negotiation are a few of the talents that are required to succeed in the oil and gas business. Here are three ways a proven mineral management team can add value to your oil and gas assets:
A mineral management company will negotiate lease agreements
The lease agreement is the most important document for a mineral owner. A poorly negotiated agreement could cost oil and gas property owners dearly in lost revenue and burden them with costly deductions and potential liabilities.
It’s the rare owner who understands mineral contract law. If you are not familiar with Pugh, depth or continuous drilling clauses and, with regard to the recent drop in oil prices, force majeure clauses, then you are at a distinct disadvantage when negotiating a lease.
Here’s one other especially important point about lease negotiation: In Texas, royalty owners have a right to an audit, but are limited to certain types of documents. Make sure lease agreements include specific audit language to ensure access to generally omitted documents needed to conduct an audit. Under Texas law landowners can look back four years to make sure oil companies are making accurate payments per the contract.
Reviewing monthly financial reports for accuracy
Mistakes in monthly production reports are commonplace and often go unnoticed for years. In our work with clients, we have found that seven out of 10 mineral rights owners were being underpaid based on the terms of their lease.
Common errors include expense deductions that exceed what is allowed in the lease and using the weighted average price of oil instead of the actual price received. Experienced mineral management firms know the components of post-production costs and how to calculate gross versus net profit to ensure your monthly royalty payment is correct.
Reviewing monthly production reports for accuracy
Unless you are familiar with the oil and gas industry, it will be difficult to reconcile production reports to royalty payments. Compounding the challenge is the lack of a generally accepted standard for production reports that are provided to royalty owners.
The best mineral management firms solve that problem by using sophisticated reporting software that allows data to be tracked, managed and shared across multiple departments. These management information systems help verify the accuracy of royalty payments.
Managing oil and gas properties isn’t a skill that most people can quickly learn. It involves juggling multiple moving parts in an industry that is marked by boom and bust cycles. By partnering with an expert mineral management firm like Argent Mineral Management you can sleep well at night knowing you have someone on your team who is always working for your best interests.