Understanding a royalty check can be confusing. To help you better understand how your monthly royalty revenue is calculated, we have detailed the main components of your royalty check below.
Net Revenue Interest
Calculating your Net Revenue Interest or Decimal Interest may seem overwhelming, but if you know the components it is actually quite simple. You will need to know the following:
1. Your Royalty Percentage
In exchange for allowing a company to drill on your property they agreed to pay you a percentage of the revenue from each well drilled. Your royalty percentage can be found on your lease agreement and will be expressed as either a fraction like 1/8 or as an actual percentage (12.50%).
2. Net Mineral Acre (NMA)
Net mineral acres represent the net acreage owned by mineral owner, of the total gross acres in a given tract of land. For example, if you own one half of the minerals under a 100-acre tract of land, you are said to own 50 net mineral acres out of 100 gross mineral acres. However, your NMA’s owned may not all be included in the Drilling unit (see item 3). Your NMA for the purposes of verifying a royalty check is only the amount of acreage you own that was made a part of the drilling unit.
3. Your Net Mineral Acres in the Drilling Unit
Drilling Unit sizes do vary by state. In most states, a drilling unit will be based upon sections or 640 acres, but because not all sections are exactly 640 acres, you will need to contact the operator and request the unit size of the wells you are being paid. Your share in the drilling unit is the number of Net Mineral Acres you own in the drilling unit divided by the total acreage in the drilling unit.
For example, if you owned 320 acres in a 640 acre drilling unit, your share of the drilling unit would be 50% (320/640). Be sure and use the exact NMA you own that is included in the unit and not all the NMA you own. If you frequent our website, you will know that many times not all of your total NMA will be included in the unit and the exact reason why your Pugh clause will come in handy later.
Calculation:
Take the number of NMA you own within a well’s drilling unit, divide it by the total acres within the well’s unit, and multiply this by your royalty interest as listed in your oil and gas lease.
Using our example above, let’s assume you own 320 net mineral acres out of a well’s 640 acre unit, and your lease states that you have a 15% royalty. Your royalty interest in the well for both oil and gas will be (320/640) x (15%) = 0.075 or 7.5%. This is the decimal interest you should see listed on your oil royalty check.
Understanding Production
Oil and Gas production from a well is reported on the check stub. The production is most often reported by “Product Code” and in a column labeled volume.
- Oil is reported in barrels
- Gas is reported in millions of cubic feet
- Natural Gas Liquids are reported in gallons
Continuing on with our calculation, take your Net Revenue Interest and multiply it by the total production for oil, gas and NGL’s to determine your share of the production from the well(s).
Understanding Commodity Prices
Every month, the commodity prices are adjusted by the marketplace. You will note the column labeled “Price”. This column provides you exactly how much the operator sold your oil, gas or NGL’s for. It is up to the operator to negotiate the best sales price possible for each commodity.
Finishing our calculation, if you take your share of the production and multiply it by the price of the commodity, you will get your “Gross” value. To determine your actual take home revenue, simply deduct the production taxes from your gross revenue to verify your net check.
