Oil & Gas Royalties – Can You Read Your Royalty Statement?
October 25, 2017
Selling oil and gas royalties can be profitable if you go about it the right way. The monthly statement you receive can mean much needed income. Yet oil and gas royalty statements can be a bit confusing, and you may not understand all the details. If you have oil and gas royalties, it is important for you to know how to read your statement so you understand what you are being paid for, how much, and how to handle these statements at tax time.
While there is no standard statement sent to those who sell oil and gas royalties, they all include essentially the same information such as that referenced below.
Identification of Producing Property
Every property that produces oil and gas must be identified on the statement using several details including tract numbers, lease names, well names, county and state, and other assigned identifying numbers.
API Well Number
A 13 or 14-digit API well number is assigned to each specific well. This number designates the location of the well, what type of well it is, and what operations are in use with this particular well.
There are two types of oil and gas royalties paid from the production and sale of extracted oil and gas. A standard royalty interest (RI) is paid to you if you if you are the owner of the mineral rights and entitled to royalties. An overriding royalty interest (ORRI) is paid to anyone who has a working interest in the mineral rights. This interest is set forth in the mineral lease.
Each product, whether it is oil, gas, sulfur, or other products, has its own code and is tabulated separately on the statement. The product is what oil and gas royalties are derived from.
The production month is the month and year in which the product that you are being paid the royalties for, and that are listed on the statement, was produced.
The product price is the price per unit that is paid to you for selling oil and gas royalties. Oil is calculated as $/Bbl and natural gas is calculated as $/Mcf.
The production quantity is the amount of product produced during the listed production month from which oil and gas royalties are calculated. The total volume of all hydrocarbons collected is listed in their respective units.
Gross Production Value
The gross production value is the volume of product produced during the listed production month, multiplied by the per unit price it is sold for.
The decimal interest is the interest ownership amount of oil and gas royalties for sale, calculated into a decimal to the eighth place. The decimal interest is multiplied by the gross production value to calculate the amount of product that belongs to you as the royalty owner.
Royalty statements also generally include a number of deductions that relate to the processing, handling, and purifying of the product. These deductions may differ, but typically include gathering, compression, dehydration, and processing deductions with natural gas production; and, gathering and treating deductions with crude oil.
When you receive your monthly statement for your oil and gas royalties, it should include all of the categories referenced above. This information identifies the well that your oil and gas royalties are produced from, and all volume and price calculations that your payments are generated from. Keep all your statements as a record of your sale of oil and gas royalties since you will need some of this information when filing your yearly income taxes!
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