Is Your Royalty Check Correct?

Have you received your oil and gas royalty check and questioned the accuracy of the production, price or expenses listed on the production statement?  If you answered yes to the question, you may want to consider a royalty audit.  In the last several years, there have been unprecedented profits in the oil and gas industry, and the royalty owner could be at risk due to the operator failing to pay the correct amount.  Operators make incorrect royalty payments due to numerous reasons that range from erroneous data entries to failure to properly input correct covenants from the lease to purposely withholding payments. 

Operators have a responsibility to behave as a “reasonably prudent operator”; however, at times they fail to obey many covenants in their leases, operating agreements and unit agreements, which may result in underpayments to royalty owners.  What happens when the operator fails to act responsibly and underpays on your royalty?  You could be out thousands or millions of dollars and your property is stolen. 

Common issues identified:

• Minerals sold to a related party at less than market value
• Unallowable costs charged to the production, transportation and/or sale
• Producer and lease requirements
• Improper working interest owner percentage calculations
• Mathematical or data entry errors
• Pooling computation errors
• Natural gas, oil, natural gas liquids or other byproduct volumes
• Legal interpretations of the lease

How can Schneider Downs help?  Most lease agreements contain an audit clause that allows the royalty owner to have an audit performed to verify the accuracy of the royalty payments and verify that your payments are correct.  Through our procedures, we will vouch production, substantiate prices and verify expenses charged are in accordance with the lease agreement. 

For more information about royalty audits, contact Schneider Downs.