Everyone will have seen the news by now that the price for WTI crude oil for May delivery went negative for the first time ever on April 20, 2020 and it closed at -$37.63 a barrel. What we talk about today is the potential impact on royalty owners and what to do if you get “paid” negative royalties.
The concept of negative prices for crude oil is a recent one and will likely cause operators to shut-in production. We also talk about what to do if wells you have an interest in get shut-in due to low oil prices.
To help answer these questions around negative royalties, shut-in royalties, and what your options are as a royalty owner, we spoke with Spencer Cox who is an attorney with Burns Charest LLP in Dallas.
As you may remember, Spencer joined us in episode 13 of the Mineral Rights Podcast to talk about royalty audits, funds held in suspense, and litigation.
Using the embedded player above, you can download the episode to your computer or listen to it here! Be sure to also subscribe on iTunes!
About Our Guest:
Spencer Cox is an attorney for Burns Charest LLP, where he represents individuals and business in complex litigation situations inside and outside of the mineral rights world. Mr. Cox was born in Paris, Texas where he attended high school. After graduating, he served in the U.S. Navy as a Naval Aviator and flight instructor in the F/A-18 Super Hornet, and recorded more than 400 arrested carrier landings. Mr. Cox graduated magna cum laude from Harvard Law School before clerking for the Honorable F. Dennis Saylor IV, of the U.S. District Court for the District of Massachusetts.
Topics We Discuss:
I have heard where some mineral owners have been charged negative royalties for natural gas because post-production deductions exceed the amount that the gas was sold for. This results in a negative balance for the month which is carried forward against future royalties. Now that the WTI crude oil spot price dropped below zero for the first time ever, there are a lot of royalty owners wondering what this means for them.
Note: The average price of WTI for the month of April 2020 is still positive since oil only closed below $0 on one trading day out of the month.
- Many leases may be worded that royalty is based on “sales proceeds actually received by Lessee or its affiliate as a result of the first sale of the affected production to an unaffiliated party.” Can operators actually charge mineral owners if they have to sell natural gas or crude oil at a loss?
- Since it depends on the terms of your lease, do you have to have certain language in place to prevent being “paid” negative royalties? If so, what type of language should be included?
- Spencer mentions that the allow ability of negative royalties varies from state to state. Is there recent case law covering this issue and what did the courts decide?
- Is there a difference in what is allowable for crude oil vs. natural gas?
- Are there any actions that mineral owners should take now to protect their interests to prevent being charged for selling natural gas or crude oil at a loss or to at least to minimize the impact on their royalties?
- So I just got a check showing a negative royalty or payment. What should I do now?
Shut-in Royalty Payments
On a related topic, with the spot price for crude oil at historic lows, many operators are going to be shutting in production. What are the things that royalty owners need to do to make sure their interests are being protected in this situation?
- What should you do if your lease does not provide for shut-in payments and the operator shuts in production?
- I know it varies by lease but in general how long can operators shut-in production and still hold the lease?
- When should you assert your right to terminate your lease if an operator shuts-in production?
Resources Mentioned in this Episode
Resources to consider if you feel you might have been wrongfully charged negative royalties:
- Your operator’s royalty owner relations department
- Your oil and gas lease (if you don’t have a copy, go to the county clerk & recorder’s website for the county where the minerals are located).
- If you have a “Market Value” lease – research nearby activity and what are others being paid. This might include:
- Texas Railroad Commission
- Oklahoma Corporation Commission (also Oklahoma Tax Commission)
- Oilprice.com
- EIA Daily Prices
- If you have a “Proceeds lease – “are they acting reasonably prudent?” Resources might include:
- Investor presentations for your operator (to tell if they have hedged production vs. selling at spot prices, to get insight into their business).
How to Contact Spencer
- Burns Charest LLP Website
- Telephone: 469.904.4550
- Email: scox@burnscharest.com
