Computing Oil Royalty Interests

Before entering into an agreement with any company when you do decide to sell your oil royalties, there's another painful detail that you need to address first. And yes, it involves mathematics.

The subhead of this article is royalty percentage and calculation. The ideal setup is for the company to offer you a royalty share off the wellhead, which means all the production costs are covered. Assuming that this matter is understood by both parties usually end up badly for the landowner because a common practice of fly-by-night operators and even some legitimate companies is to cheat you into sharing the delivery of the hydrocarbons.

Again, you can immediately spot these tricks by having an expert legal counsel study the contract or browse for templated oil and gas royalty calculators, which are included in some company websites online.

There are several methods to calculate percentages and determine how much should your royalties be.

Current price trends. As you can imagine, your royalty share fluctuates according to the prevailing price of oil in the global market as opposed to getting a fixed price for a certain number of years. Anchoring your share on the volatile market can either spell boon (as when prices peak with the growing demand) or bane (when prices plunge on overproduction). A common clause under this method is for company to base their prices at the highest percentage in oil fields within a hundred miles of where your property is located.

In kind. This is another variation of the current price trending though, instead of cash payments, the landowner is entitled a share of gas or oil instead before the production company will sell the net yield in the market. One advantage is the freedom of the landowner to find an independent buyer that can offer the best deal instead of the relying on the production company which might be tied down by seller's contract. The landowner can also ask to get his share of the royalty in proceeds.

Actual income. Probably the lousiest deal of the bunch, depending on where you are sitting. In this instance, your share is attached to the actual sale of the oil and gas the company produces, not on the prevailing market trends. But this method is more commonly used in gas production and only when the landowner and winning bidder has developed a long-term partnership to have established a certain level of trust.