Mineral Royalty Audits and Why It’s a
Job Best Reserved for a Lawyer
By Richard Ross Hyde, Jr.
S
calculate your neighbor’s royalty
payments, then one of two general
reasons might explain the differ-
ence in payments: (1) your lease’s
terms differ materially from your
neighbors, or (2) your operator, the
lessee, might not be calculating the
royalty per the terms of your lease.
To further explore these reasons, it
is recommended that you retain a
qualified attorney to conduct what
is referred to as a “mineral royalty
audit” or “royalty revenue audit.”
Many associate the term “audit”
with its income tax connotation. In
an income tax audit, the govern-
ment examines an individual’s tax
return to verify that the income
and deductions reported are accu-
rate. In doing so, the government
analyzes underlying documents
and data that reflect the taxpay-
er’s genuine financials in order to
establish compliance (or noncom-
pliance) with tax code rules and
regulations. Similarly, a royalty
revenue audit involves an analysis
of key documents and data to verify
whether operator properly paid all
royalty payments due. However,
unlike tax or financial audits, most
of which are well suited for an
accounting professional, a mineral
royalty audit is best reserved for an
attorney.
An oil and gas lease is a
contract. And as is the case with
any contract, barring limited
exceptions, courts determine the
meaning of its language. The writ-
ten terms in the contract control,
and case law dictates the mean-
ing of particular words or phrases
in the lease. It is immaterial what
you may have thought those terms
meant. Moreover, barring limited
exceptions, it is immaterial what
Richard Ross Hyde, Jr.
your operator may have told you
the terms meant. Therefore, given
the fundamental importance of
“lease interpretation” to the miner-
al royalty audit process, your most
prudent course of action when
vetting any royalty discrepancy is
to seek counsel from an attorney
well versed in current oil and
gas case law. To be sure, there
are many consulting companies
that offer lease compliance and
accounting services to the oil and
gas industry. However, insofar as a
non-attorney provides such servic-
es, you can expect a disclaim-
er of any legal analysis in the
services provided. Of course, this
means that the consulting agency’s
study is entirely contingent upon a
fundamental assumption, which,
if incorrect, will alter the study’s
conclusion. Indeed, most non-
attorney royalty consultants will
expressly advise the client to seek
outside legal counsel. Therefore,
while non-attorney consulting
services may be less expensive,
competent legal counsel should be
consulted.
This article is for informational purposes only
and not for the purpose of providing legal
advice. You should contact an attorney to
obtain advice with respect to a particular
legal issue.
Richard Ross Hyde, Jr. is an attorney with
Harris, Finley & Bogle, P.C. Rich’s practice
focuses on complex litigation, including oil
and gas matters. Rich may be reached at
[email protected] or (817) 870-8702.
o you signed an oil and gas lease
and the operator drilled a well
somewhere on your land or some-
where on some land “pooled” with
your land. The well is successful.
It consistently produces natural
gas each month, and, in turn,
your operator mails you a monthly
check for your royalty share of
the gas produced. Initially you
were satisfied with this mutually
beneficial arrangement—that is,
until your neighbor showed you
the royalty check he received from
a competing operator he leased
with. Your neighbor’s leased acre-
age shares a borderline with your
leased acreage. And your neighbor
leased almost exactly the same
number of acres that you leased.
But your royalty check is materi-
ally less than your neighbor’s. At
this point, you ask yourself, “What
gives? Is my operator holding its
end of the bargain?”
While operators by and large
do a good job of calculating and
paying royalties, mistakes can and
do happen. The calculation of a
mineral royalty payment involves
a multitude of considerations, any
one or more of which could explain
the discrepancy between you and
your neighbor’s monthly checks.
To explore every possible reason
goes well beyond the scope of this
article. However, generally speak-
ing, all other factors being equal,
your monthly royalty check should
increase or decrease in tandem
with applicable commodity prices,
total production volumes, and, if
your land is pooled, the amount of
acreage your operator pooled from
your lease into the production
unit. Assuming those figures are
comparable to the figures used to
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