Are You Being Paid Correctly? The math behind your decimal interest. September 7, 2017
It is important to understand how an interest is being paid from oil and gas development. Recipients of various types of interests in oil and gas properties are paid on a decimal interest. This is a number that indicates your right to a part of the share of proceeds.
To calculate a typical royalty interest, one must know the drilling spacing unit as well as the net mineral acreage that participates in the drilling spacing unit.
To illustrate the math behind determining a decimal interest in certain acreage, the following process is followed. In this example, we assume that the mineral interest is over a section of land which is 640 acres. There is only one well allowed for the 640 acres which is called a spacing unit. The original mineral interest was held by the preceding generation which had 100% of the interest. The minerals have now been split between two family members. The example that follows is to calculate the interest for one of the two family members.
Facts for the example:
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Spacing unit = 640 acres (one section of land)
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Interest = 320 undivided net mineral acres
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Royalty = 3/16 or 0.1875
The interest for one of the two family members that now holds the minerals is 320 undivided net mineral acres. To calculate this, divide 640 acres by the number of divisions as it was passed down to the next generation (two siblings, so, therefore, divide by two).
A common question is “What does undivided mean in the net mineral acres?”. Undivided means that the acreage was split by percentage rather than splitting the 640 acres into two separate 320 acre parcels. It means that the interest is still a part of the entire 640 acres but now only 50% of that acreage. A divided interest is different in that one party may get the west half of the section and the other party gets the east half of the section. They still each have 50%. The distinction between divided and undivided is important.
The formula to figure the correct decimal interest in the above scenario is:
The resulting decimal interest, in this example 0.09375, should match your Division Orders and your revenue statements that accompany your checks. If this does not match, you may be underpaid by the producer. If you suspect that you are being underpaid, please call Turrett so we can perform a consultation to determine if an audit is appropriate to correct your revenue payments.
These materials have been prepared solely for educational purposes to contribute to the understanding of oil and gas appraisal. These materials reflect only general concepts in the industry based on Colorado and may not apply to all circumstances. It is understood that each case is fact ‐ specific, and that the appropriate solution in any case will vary. These materials may not be relevant or apply to any particular situation. While every attempt was made to ensure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.