3 of this lease to the contrary and this paragraph shall not be treated as surplusage despite the holding in the cases styled “Heritage Resources, Inc. v. NationsBank,” 939 S.W. 2d 118 (Tex. 1996) and “Judice v. Mewbourne Oil Co.”, 939 S.W. 2d [133,] 135- 36 (Tex. 1996). Royalty Payment Based on Index Price Typically, a royalty owner is paid on the posted index price less any costs incurred by the oil and gas company to move the product to a refinery. For oil, this can be done by rail and so the railroad charges a fee to the oil and gas company and this fee is deducted from the per barrel price. The royalty owner’s decimal interest is multiplied by the number of barrels produced at the reduced (after deducting transportation costs to get it to the refinery) per barrel index price. In the olden days, during my time at Exxon, it was a requirement to include the index price and any deductions, such as transportation costs, on the division order. This allowed royalty owners to understand how their payments were calculated and replicate the calculation if needed. For instance, if the posted index price for oil was based on WTI (West Texas Intermediate), but “gathering and handling, including rail car transportation” amounted to a total deduct of $18 fee, we would display the posted price as WTI minus the $18 gathering and handling, including rail car transportation fee on the division order. As a result, the royalty payment would be based on $52 per barrel, if the WTI posting was $70 per barrel that particular month. Deducting transportation costs from the posted price and paying the royalty owner based on the actual price is still a standard practice in the industry today; however, today most companies use the NADOA Model Form Division Order with no added provisions.
Formula for Royalty Owner: Decimal Interest * number of barrels produced x $52/barrel
*Royalty Payment Typically Based on this
Impact of New Interpretation According to the Houston Chronicle article, there are about 5 leases in the new lawsuit with this key language, but it could affect up to 200 leases with the same provisions in the area. And, of course, any new leases negotiated with these added provisions will be affected. Let’s do a current example of one month for a large landowner to see how this issue might affect one individual lessor who owns 100% of the minerals in an Eagleford well with a ¼ RI: See the chart below for a new well’s production in the Eagleford shale. The well will also produce gas, but we will examine just the oil in this example. (a) 1500 bbls per day x 30 days = 45,000 bbls x posted price of $70 per bbl = 45,000 * $70 = $3,150,000 * ¼ RI = $787,500 , with an additional deduction for severance tax (b) 1500 bbls per day x 30 days = 45,000 bbls x posted price of $70 per bbl less the $18 gathering and handling, including rail car transportation fee cited in the case = 45,000 * ($70-$18= $52) = $2,340,000 * ¼ RI = $585,000 , with an additional deduction for severance tax
This is a difference of roughly $200,000 more per month owed to this particular royalty owner.
Posted price Its long been held that landowners and producers have the opportunity to reach an agreement regarding the rightful amount of royalty, the criteria for its calculation, and the allocation of expenses. It is important to note that a landowner’s royalty
Example:
Posted Index Price: West Texas Intermediate....................$70/barrel Railroad Fee: ....................................- $18/barrel Royalty Payment based on: ........$52/barrel oil*
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N at i onal A ssociation of D i v i s i on O rder A nalys t s
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