Oil/Gas/Oil and Gas Royalties
I have an interest in a well in Payne County, OK that is producing 690 bopd and 879 mcf gas per day. When can I expect to receive royalties on this production and how can I estimate the amount I will receive?
An easy way to estimate your potential royalty in a hypothetical (or actual) well is to use what's called your "decimal interest." It's a good thing to know, because your decimal interest is also used by the company to figure your royalty.
To figure your decimal interest, take the number of acres you own in the unit and divide it by the number of acres in the unit then multiply the result by your royalty fraction. More on spacing units below.
Once you've got the decimal interest figured, simply multiply it by how much money the well brings in each month (to the company…i.e. the “gross sales.”) to find out what your approximate monthly royalty check will be. There may be more than one entry for each month's gross value, so you must add them together in such cases. Sometimes a month's total gross value will be spread over more than one check stub as well.
If you already know the decimal interest, unit size, and royalty fraction, you can use a similar formula to arrive at your net acres owned in the unit.
Most gas wells are spaced at 640 acres, though there are other "unit sizes" ranging from 160 acres all the way up to 1280 acres, and they are not always nice even numbers, especially in states such as Texas that do not employ the Congressional Survey System (Section, Township, and Range) in their legal descriptions. The "unit size" determines how much area a well can "drain." Let's use the most common 640 acres for our example.
A 640-acre spacing unit is allowed to drain gas from 640 acres of minerals. This means that anyone who owns minerals under this 640-acre section of land will share in the proceeds of any producing wells that are completed; those outside of this area would not.
Say you own 40 acres of minerals under a 640-acre drilling and spacing unit. You would get more royalty in the unit than someone who only owned 20 acres (twice as much) but would get less than someone who owned 80 acres (you'd get half what they got.) The amount of acres you own proportionate to the whole unit is what determines your ownership percentage in the unit, and thus your "decimal interest."
Here’s an actual example of how to figure your decimal interest: Take the number of acres you own in the unit (40, for example) and divide it by the number of acres in the unit (640, for example.) This will give you what's called a "working interest" decimal, which is what you'd use if you were participating in the well by paying your share of the costs associated with drilling it. In this example it would be .0625.
Likely though you won't choose to participate in the well so we'll continue on and multiply the working interest decimal of .0625 by the royalty on your lease (usually 3/16 or 1/8.) In this case we'll use 3/16, which is .1875 in decimal form. .0625 X .1875 is approximately .0117. This will be your "decimal interest."
The decimal interest represents your "royalty interest" in the unit, proportionate to your ownership in the whole 640-acre unit. Had you owned the 200 acres rather than only 40, your decimal interest would have been figured thusly:
200 divided by 640 times .1875 = .0586 (about)
As you can see, you can plug any number you like into this formula. Once you have your decimal interest, take the amount of money that the well makes in a month and multiply it by your decimal interest. The result would be about what you could expect in royalty that month.
A decent gas well might produce 30,000 MCF of gas per month. "MCF" is an acronym for "thousand-cubic-feet" so 30,000 MCF is really shorthand for 30-million cubic feet of gas.
Let’s assume natural gas sells for about $6 per MCF (wishful thinking these days.) If a well produces 30,000 MCF in a month that would mean there was $180,000 in sales from the well that month. Multiply that figure by your decimal interest to arrive at your approximate royalty for the month. In our example, your 40 acres of minerals owned in a 640-acre unit at 3/16 royalty would come out to about $2,109.37 for that month.
Hope this helps you figure your royalties.
Alternatively, if you don’t know how many acres you own, or want to confirm it, you can use the decimal interest shown on your check stubs (sometimes called “owner decimal”; “payment decimal” or similar.) Take the decimal interest shown on your run sheet, multiply it by the unit size if known (i.e. 640 acres) then divide by the royalty amount. The result is the net acres you own in the unit.
If you don’t know the unit size or royalty, you’ll need to contact the operator or perhaps the lease. A copy of the lease (showing the royalty and perhaps the unit size) will be filed in the county courthouse in the county where the minerals are located. Your operator would also know the unit size.
Hope this helps you out.
Frederick M. "Mick" Scott CMM RPL
The Mineral Hub