Your Oil and Gas Royalty Statement
How Do You Verify Whether The Statement Is Correct?
You receive your oil and gas royalty statement. What is the basic information that you should be receiving? For the information that you do receive, how do you verify its accuracy?
In terms of what should be on your oil and gas royalty statement, Pennsylvania law requires that certain, specific information be included. Pennsylvania’s Oil and Gas Lease Act, 58 P.S. § 33.1 et seq., provides that the following information must be included on your royalty statement:
Whenever payment is made for oil or gas production to an interest owner, whether pursuant to a division order, lease, servitude or other agreement, all of the following information, at a minimum, shall be included on the check stub or an attachment to the form of payment, unless the information is otherwise provided on a regular basis:
(1) A name, number or combination of name and number that identifies the lease, property, unit or well or wells for which payment is being made; and the county in which the lease, property or well is located.
(2) Month and year of gas production.
(3) Total barrels of crude oil or number of Mcf of gas or volume of natural gas liquids solid.
(4) Price received per barrel, Mcf or gallon.
(5) Total amount of severance and other production taxes and other deductions permitted under the lease, with the exception of windfall profit tax.
(6) Net value of total sales from the property less taxes and deductions from paragraph (5).
(7) Owner’s interest, expressed as a decimal or fraction, in production from paragraph (1).
(8) Interest owner’s share of the total value of sales prior to deduction of taxes and deductions from paragraph (5).
(9) Interest owner’s share of the sales value less the interest owner’s share of taxes and deductions from paragraph (5).
(10) Contact information, including an address and telephone number.
There may be more information that is included on your royalty statement, but the aforesaid is the minimum amount of information required by Pennsylvania law.
Now, you have received your royalty statement, you have reviewed it, but you have a question as to whether the information is correct. How do you verify whether the information is correct? How do you verify whether the deductions are correct? How do you verify whether the amount that you have received is correct?
The first place to look is your lease. Is there a provision that allows you to check or verify what is stated on your royalty statement; e.g., deductions and the amount that you are being paid? Is there is a requirement in your lease that the oil and gas company provide you with information about your royalty statement upon your request? If not, there are three ways that you may be able to obtain the information.
One way is to ask the oil and gas company for the information yourself; however, if there is nothing in your lease that requires the oil and gas company to furnish this information, you may not receive it or if you receive it, it may take some time before the information is provided and you may not be satisfied with what you get. Another way is to file suit in court to obtain the information needed; however, this is a cumbersome way of proceeding, being costly and time consuming. A third way is to contact people who are in the business of verifying the accuracy of royalty statements.
One way that you may be able to insure that you receive the information necessary to verify the accuracy of your royalty statement is to have an “audit clause” in your lease. Having such a clause in your lease contractually binds the oil and gas company to provide the information necessary for you to verify the accuracy of your royalty statement. An “audit clause” may have varying language, but an example of what may be included in an “audit clause” would be the following:
Lessee further grants to Lessor or Lessor’s agent the right annually to inspect, examine, or audit books, records, and accounts of Lessee pertinent to the purpose of verifying the accuracy of the reports and statements furnished to Lessor, and for checking the amount of payments lawfully due the Lessor under the terms of this agreement. In exercising this right, Lessor shall give reasonable notice to Lessee of its intended inspection, examination or audit and such shall be conducted during normal business hours at the local office of the Lessee. Such inspection, examination or audit shall be at the sole cost and expense of Lessor and Lessee shall afford Lessor the time reasonably necessary to conduct a full inspection, examination or audit covering the purposes described above.
An “audit clause” in your oil and gas lease will give you the contractual right to check the books and records of the oil and gas company to verify the accuracy of your royalty statements. Normally, this is done once a year. It should be at an office of the oil and gas company that is convenient to you. In other words, you do not want to have to go outside of your locale if the oil and gas company has an office near you.
The language of the “audit” clause should also include more than the word “audit.” The word “audit” may convey a detailed and full blown examination of books and records of the oil and gas company vis-a vis your royalty statement, which would be conducted by an accountant. You may not want to do this due to the expense involved. Accordingly, the “audit clause” should include words such as inspection or examination, which is something that may be much less than an audit that would be conducted by an accountant. In addition, you may not want to use an accountant to do the examination of the oil and gas company’s records. You yourself may have the expertise to do so, or you may only need certain information. In the alternative, you may want to have someone who regularly conducts verifications of royalty statements to conduct the examination. These may not be accountants, but they would have the expertise to conduct an examination or inspection of the oil and gas company’s records to verify the information on your royalty statements.
Of the methods that are available to verify the accuracy of royalty statements, having an “audit clause” and having the inspection, examination or audit conducted by someone who regularly verifies royalty statements for royalty owners, including oil and gas landowners, may be the most efficient way to verify the accuracy of your royalty statements.
In Pennsylvania, there is currently no statutory requirement that an audit clause be included in your oil and gas lease. Accordingly, in negotiating your lease, you should have an “audit clause” inserted in your lease in order that you would have the contractual right to inspect the records of the oil and gas company to verify your royalty statements.
An oil and gas attorney can negotiate such a provision for you.