What Are Royalties Interest Deductions?

If you own land and receive oil and gas royalties in New Mexico or Oklahoma, understanding the structure of your royalty payment can be confusing. Numerous factors are at play, and you need an intimate knowledge of the legalities governing these payouts to avoid leaving money on the table.

Find out more about royalties deductions in this article, then contact our oil and gas attorneys at Nix Patterson if you have legal questions about your royalties checks. Our attorneys can also help negotiate your oil and gas lease, which may reduce the fees taken from your checks.

What Factors Determine the Size of Oil and Gas Royalty Checks?

Suppose you lease your land’s mineral rights to an E&P company. You usually sign a deal with a bonus payment upfront, followed by a percentage of the oil and gas royalties over time. The royalties in your check depend on the amount of oil and gas the well produces and the royalty percentage your attorney negotiated in your lease.

If the E&P company drills an oil and gas well and it starts to produce, you will receive a monthly royalty check until the well no longer produces. The more the well produces, the larger your royalty check.

Also, the higher your negotiated percentage, the bigger your royalty check. Most landowners receive 12-20% in monthly oil and gas royalties. The difference in percentages significantly affects your royalty income.

These are the two major factors that influence the size of your royalty check, but another factor needs to be understood too: Deductions.

Understanding Deductions From Royalty Checks

When you sign or inherit a lease and the property is drilled, you cannot wait to receive that first royalty check. But when it appears in the mailbox, you notice more money is being taken out in fees than you expected. This is similar to getting your first check at a new job — more deductions might be taken than you initially thought. But these fee deductions are not always allowed in the oil and gas context.

Regarding royalty checks, many landowners aren’t ready for those royalty deductions. Several large fees may be taken from your checks in royalties deductions, including fees for:

  • Gathering
  • Compression
  • Processing
  • Transportation

These fees are known as “post-production costs.” Other fees may be taken out of your check, but these four are usually the largest. These fees are purportedly for the costs the E&P company incurs to transport, treat, and process the oil and gas after it has been produced from the land.

The oil and gas company has to pay to market and sell the oil and gas. But the oil and gas company is not usually allowed to pass these post-production costs on to royalty owners.

If you are seeing deductions taken from your royalty checks, you should call us immediately. The lease agreement you have with the oil and gas company explains (usually in hard to understand language) whether the oil and gas company is permitted to deduct post-production costs. If your lease does not allow post-production costs to be deducted, you may be entitled to a refund plus interest on the unpaid amounts. 

If you still do not understand the deductions from your royalties checks, talk to a Nix Patterson oil and gas attorney.

What Can You Do to Reduce Your Royalties Deductions?

When negotiating a lease with the E&P company, you should insist on a cost-free royalty interest where the lease expressly states that no post-production costs may be deducted. You may even consider taking a slightly lower royalty percentage to avoid the extra costs. But when negotiating an oil and gas lease, you should always consult a lawyer for advice on your state’s particular royalty law.

Contact the Oil and Gas Lawyers at Nix Patterson Today

If you have questions about royalties interest deduction or related matters, Nix Patterson can help. Contact our oil and gas attorneys today for a complimentary consultation about your oil and gas royalties and related subjects.

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