Why Am I Getting Deductions Taken Out of My Royalty Checks?

When it comes to oil and gas royalties, sometimes landowner expectations are greater than the checks that show up in the mail. There can be a couple of reasons for this.

One is that oil or natural gas production on your property or pooled unit may not be quite as good as you, or the exploration and production (E&P) company that leased your land, had expected. Another is that some landowners aren’t expecting to see the large deductions taken out of their royalty checks by their E&P company.

What exactly are these fees—and why do so many landowners get them deducted from their royalties? To explain the source of these costs, let’s first quickly look at how leasing and royalties work.

Key Factors Determining How Much Landowners Receive in Oil and Gas Royalties

When you lease your mineral rights to an E&P company, you typically sign a deal where you get a bonus payment upfront and then a percentage of the royalties down the line. The amount of royalties you get is based off how much oil or gas your property produces and the negotiated royalty percentage included in your lease.

More Production = More Royalty

If the company ultimately ends up drilling a well that includes your minerals (which in some cases can take a while) and the well begins producing, you will begin to receive a royalty check every month until the well stops producing and your Oil and Gas Lease expires. The more a well produces the greater the royalty amount will be.

Higher Percentage = More Royalty

With most leases, landowners get somewhere between 15-20% in royalties. The difference in percentage points has a considerable impact on your future royalty income. If you’re receiving 20% in royalties, you will make 1/3 more in royalty income than a landowner receiving 15% in royalties in the same well.

These two factors play a big role in determining the size of your royalty checks. But there’s also a third, less-known factor that plays a role in deciding how much in royalties you actually get to put in the bank.

Hidden Fees: Costs that Oil & Gas Companies May Deduct from Your Royalty Checks

Once you sign a lease and your property has been drilled, you eagerly await that first royalty check. But when it shows up, you notice money is being taken out for different fees. It’s like getting a first paycheck at a job and realizing a chunk of your earnings are being taken out for other things like state and local taxes, FICA (Social Security and Medicare), workman’s comp, etc. If you’re not ready for it, seeing those deductions can be a surprise.

In the case of royalty checks, many landowners aren’t ready to see all of those dollars deducted from their royalty. That’s supposed to be money in your pocket. So what are those “hidden fees” you’re paying for? Where do they come from?

The Big Four fees you’ll probably see on your royalty checks are for:

1. Transportation
2. Gathering
3. Compression
4. Processing

*You may see other fees as well, with other names. But these are usually the big ones.

While these fees may often come as a surprise to landowners, they are actually laid out in the lease you sign with the E&P company. The fees are for costs incurred by the company to gather the oil or gas from your property, and transport, treat and process it. Essentially, these are the costs involved to take the product from the ground, clean it up so that it can be sold, and then move it to the buyer.

The E&P company pays to market and sell its product. When most landowners sign a lease with an E&P company, they are agreeing to share the costs of that part of the process by having it come out of their royalties. Of course, it’s much different to see these costs discussed in a document than it is to see them coming out of your check.

Is There Anything You Can Do to Decrease Your Mineral Royalty Fees?

If you haven’t signed a mineral lease yet, the good news is there’s something you can do to lessen or eliminate the fees mentioned above. You can negotiate with your E&P company to get a gross royalty or a cost-free royalty. A Cost-free royalty is the best option here if you can get it since (as the name implies) it will keep you from paying all those extra fees. It may even be worth taking a slightly lower royalty percentage in exchange for a cost-free royalty.

If you’ve already signed your Oil and Gas Lease, unfortunately, there’s not much you can do now. If your lease is close to running out and you’re thinking of extending or leasing your minerals again, you can always negotiate to get a gross royalty or cost-free royalty lease at that point. There’s also the option of selling your mineral interest. This way you get cash upfront for your minerals so it doesn’t matter what happens with production on your property, good or bad. It doesn’t change the terms of your current Oil and Gas Lease, and is another available course of action that might make financial sense for you.

Interested in learning more about selling your mineral royalties? Connect with Gateway Royalty today to see if we can help.