Part of what I do for clients as a Texas oil and gas attorney is to calculate oil and gas royalties so that they can be sure they are being paid correctly. I thought it might be useful to you to explain how an ownership percentage and royalty are calculated.
1. First, we take your percentage of mineral ownership in the land in question, and we multiply that by the number of surface acres in your entire tract. The resulting number is your net mineral acres. For example, if two relatives together own a one-half interest in a forty acre tract, or ½ times 40, they have twenty net mineral acres.2. Secondly, if the land is located in a pooling unit, (sometimes also called a pro-ration unit), we multiple the total number of acres in the tract by a pro-ration fraction. The reason for this is that each royalty owner in a pooling unit is only entitled to their proportionate share of the oil or gas produced by the entire pooling unit. A pooling unit is an area around a well that is set by the Texas Railroad Commission, and is intended to approximate the area drained by a producing well. Pooling units can range in size from 80 to 640 acres or more. For example, for a forty acre tract that is located in a 320 acre pooling unit, that forty acre tract is entitled to 40/320, or 0.12500, of the minerals (whether oil or gas or both) produced by that 320 acre unit.
3. Third, we multiply that result by the royalty fraction in the oil and gas lease you signed.
4. Finally, we divide that result by the number of current owners to determine what portion of the total production from the pooling unit each owner is entitled to.
By way of example, let’s say you and a relative own 20 net mineral acres in a 40 acre tract. Let’s also say that the pooling unit is 320 acres. This fraction in our example would be 40/320. Next we multiply that result by the royalty fraction in the oil and gas lease that was signed, which in our example is 1/6. Finally, we divide that result by the number of owners, which in our example is two.
Here is the calculation for our example in numeric form:
First, I convert the fractions to decimals so they are easier to multiply:
20/40 = 0.5
40/320 = 0.12500
1/6 = 0.166666
1/2 = 0.5
Next, I multiply out the calculation:
0.5 X 0.12500 X 0.166666 X .5 = 0.005206
The result of this calculation is that for every dollar of gas sold from the well, you and your sister in our example would each get 0.005206 of that dollar. This does not seem like much, but a good gas well can produce millions of BTU’s of gas, and so the royalty payments can be substantial.
Oil and gas companies can and do make mistakes in calculating a mineral owner’s royalties. If you think your royalties are not being calculated correctly, give me a call.