Distribution of Gas Royalties – Is It Always Done Equitably?
October 8, 2018
The U.S. is one of only a few countries that allow private ownership of minerals like oil, gas, and other natural resources through ownership of the land or rights.
Ownership can provide wealth for some in the form of royalties.
Yet actually earning money through the selling of gas royalties can be more challenging than you might think.
Many question the distribution of funds when selling gas and oil royalties, and with good reason.
The laws are complex and as some believe, unfair.
This has led to a growing number of lawsuits as mineral owners question why they aren’t seeing more return from their natural mineral ownership.
Mineral Owners Not Seeing Expected Royalties
The question over equitable distribution of gas royalties has become a prominent issue in recent years as the production of minerals in Texas and other areas has exploded.
Mineral owners selling their royalties are signing contracts and expecting a certain percentage from the production of minerals on their land and not seeing the returns they were promised by the energy companies contracting with them.
With some owners raking in the royalties, it leaves others wondering why theirs are not paying off. Allegations of energy companies cheating mineral owners have progressed to the point of many class-action lawsuits being filed.
The problem is that while the reason behind these low percentages might be due to questionable business practices, the energy companies are technically not doing anything wrong.
They are simply looking out for themselves as every business does.
The Problem of Post-Production Costs
To understand the problem of this inequitable distribution of royalties, one has to understand how royalty amounts are set to begin with.
When energy companies contract with mineral rights owners looking to sell gas royalties, the two parties agree that the owner will receive a signing bonus initially, then receive a percentage of the production proceeds.
The disparity comes in determining when in the production process these proceeds are calculated.
Some states require energy companies to pay a minimum percentage to owners.
Although this seems fair, what many companies fail to divulge in their contracts, and what many inexperienced owners selling their royalties fail to confirm, is that they will make deductions for a portion of their post-production costs.
These are costs associated with transporting the oil and gas from the well and processing it to be used.
Some drillers assume the cost themselves; others don’t.
The ones who don’t pass on a portion of the cost as deductions to their royalty payments, many times reducing the payment to well below the agreed-upon or required minimum percentage.
Since these expenses are operational costs, the law permits this practice.
Getting A Fair Share is All in the Contract
Currently, many class-action lawsuits have been filed in the U.S. over the distribution of royalties and the laws pertaining to how they are paid.
In the meantime, experienced brokers can only suggest that mineral owners obtain legal assistance when interpreting and negotiating royalty contracts or work with a reputable royalties company.
By bringing the issue of post-production costs to the forefront and agreeing on how they will be handled, mineral owners selling their minerals have recourse on how to hold onto more profits and at the least, know what to expect.
Owners selling their oil royalties can definitely benefit from doing so; however, it demands careful discussion about things like post-production costs and other fees the energy companies may try to recuperate through lowered payments!
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