Factors effecting oil and gas royalties value
If you receive royalty checks, you may have recently noticed a decrease in the amount you receive. There are may factors affecting oil and gas royalties value which play a role in how much you receive. Each one of these factors is part of the picture when you look at what your royalties checks will be each month. As a royalty owner, it can be difficult to understand why your royalties checks change each month. We’re going to help break down the major components of your royalty checks and why it can change so much each month!
There are two primary drivers that determine how much your royalties check will be each month. Since these two are such a major component, it’s important to point out that if either of them change it will have a very large effect on the amount you receive each month. If you notice your royalties checks fluctuating in value, these are the top two most likely reasons!
Production: Each month on your oil and gas check stub, you will notice that it lists the production from the well. It’s almost never going to be the same amount as the oil and gas production varies from month to month. Generally speaking the production on a well will stay relatively consistent. It may be 50 barrels one month, then 48, 52, and 49 the next few. However, there are situations where a well suddenly stops producing as much as it did. It’s also possible for the well to stop producing entirely and the well be shut in for a period of time while the operator decides how it wants to proceed.
When production does change, it typically changes to the downside. The reason is that wells rarely start producing more with extra effort. Since the change is to the downside, if you see production dropping on your checks, it’s going to have a negative impact on the amount you get in the mail each month for your royalties.
Oil and Gas Prices: The other major factor affecting oil and gas royalties value is the current price of oil and gas. Since your royalty check basically comes from production x oil and gas price, when the oil and gas prices change it has a large impact. In most cases your production remains relatively consistent, so what’s really happening is that the price of oil and gas has move since the last check that you received. In the last 6 months we have seen oil drop from $100/barrel to $50/barrel. Does this mean a 50% drop in your royalty checks? Not necessarily, but generally speaking it’s going to have a very big impact on the amount you receive.
Other factors effecting oil and gas royalties value
While the factors above will have the biggest effect, each of the factors below also plays a role in how much you get each month. If you see production and oil and gas prices stay the same, it’s very possible that one of the factors below has made an impact on your check.
Initial Decline: This fall in line with production, but it’s worth mentioning because it confuses a lot of new royalty owners. When a well first starts producing, it begins by producing substantially more than it will in the long haul. The most significant decline takes place during the first 1 to 3 years. After that, production will begin to level off until it finds it’s sweet spot. From there it will slowly decline over many decade. This means that if you just started getting oil and gas royalty checks, it’s going to decrease significantly for a little while before it settles at a normal level.
Deductions: Some royalty owners have deductions (expenses) removed from their royalty checks. Other negotiated not to have any deductions so nothing is removed. If you have deductions from your royalty checks, it means that the oil and gas operator can deduct certain expenses associated with market and producing the oil and gas. These deductions can start to add up to a lot of money depending on the operator, location, and expenses associated with the well.
Sales Price: When you see oil and gas prices in the news, you may read that oil costs $50/barrel. Many royalty owners make the mistake of believing that $50 is what the operators are paid when they sell the oil but that’s not actually the case. There is a transportation and marketing expense that can eat up between $5-$10 (approximately) of per barrel of oil. That means that when oil is selling for $50/barrel, the operator is only getting $40-$45/barrel.
Recompletion/Workover: Did you see a significant increase in the amount of your oil and gas royalties check? If so, it’s likely that a recompletion or workover was done on the well. A recompletion or workover occurs when a well is either under performing, or the operator believes they could get significantly more production for recompleting the well. If your royalties checks more than doubled, that’s a good indication that a recompletion or workover was performed!
Accounting Adjustments: Sometimes in the process of calculating the volume of oil and gas produced, the sales price, or the revenue produced accounting can make a mistake. This could be a mistake that goes in your favor or against you and there’s no way to know when or why it happens in the course of business. A key indicator that an accounting adjustment has been made is that the dates on the check will span a very large period of time. A normal royalty check will span 1 to 2 months of production. If you see dates going back for many months, it’s likely that an accounting adjustment took place that correct what was previously booked.
Questions about factors effecting oil and gas royalties value?
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