Oil and Gas Attorney on Royalty Underpayments and Audits

Production reports record quantities extracted during a specified month. Royalty statements may reflect sales settled weeks later.

A June payment, for example, might cover April production. Comparing the same well, product, measurement unit, and production period avoids treating a reporting delay as missing revenue.

Well identification numbers and dated operator records can establish which production belongs to each payment.

A well's total output is not necessarily payable to one owner. Operators may allocate production among leases or participating interests.

The ownership decimal should be checked against the lease, applicable division orders, and records establishing the owner's payable interest. Applicable oil and gas rights determine the share entitled to payment.

A reduced decimal may explain a smaller check, but the underlying allocation must support that change.

Purchaser settlements may identify the quantity sold, transaction date, and price received. These records allow comparison with the revenue reported on the royalty statement.

For illustration, 1,000 barrels sold at $70 generate $70,000 in gross revenue. If the royalty rate is 15% and the owner is entitled to the full applicable royalty share, the calculated royalty is $10,500 before permitted deductions or adjustments.

A fractional ownership interest would change the amount payable. The example is not a California statutory royalty rate.

Purchasers sometimes correct measurements, revise prices, or adjust earlier settlements. Operators may record those changes in later royalty payments.

A negative adjustment should identify the affected sale and production period. Without supporting details, the owner cannot readily determine whether the reduction reflects a correction or an unresolved discrepancy.

Invoices and allocation schedules can show how an operator assigned transportation or treatment costs to production.

A reconciliation should identify the service performed, billing period, allocated quantity, applicable rate, and amount deducted.

Even a legitimate expense may produce an incorrect payment if charged twice or assigned to an unrelated period.

A lease may value production at the wellhead or another specified point, affecting which post-production costs may be deducted. Each charge must have a contractual basis, and a general label such as "operating expense" does not establish that it is permitted.

An oil and gas law review may also examine amendments and applicable legal restrictions affecting the deductions.

California Public Resources Code § 3227(a) generally requires well owners to report specified production information for the preceding calendar month by the last day of each month, subject to authorized reporting exceptions.

CalGEM's WellSTAR system provides access to reported well information and production data. Those figures can reveal differences between public records and the quantities appearing on royalty statements.

However, reported production does not establish the volume sold during a particular settlement period, the realized price, or an individual owner's entitlement.

Some leases allow royalty owners to inspect accounting records or request supporting calculations. The agreement may specify notice requirements, inspection periods, or limits on accessible documents.

Before requesting an audit, the owner should confirm any contractual notice deadline, lookback period, and restrictions on the records available for inspection.

An audit request may cover purchaser settlements, allocation schedules, and invoices supporting deductions for identified payment periods.

The relevant mineral rights documents help establish who holds those contractual rights. Section 3227's public reporting obligation does not independently grant unrestricted access to an operator's private accounts.

Incorrect ownership decimals, omitted sales, or unauthorized deductions may reduce royalties, while settlement delays or valid adjustments may explain apparent discrepancies.

For each disputed period, compare the amount contractually due with the amount paid. Accounting errors may warrant supplemental payment, while valuation or deduction disputes may require interpretation of the lease.

California Code of Civil Procedure § 337(a) generally provides a four-year limitation period for claims founded on written contracts. The period ordinarily begins when the particular claim accrues, not automatically when the owner discovers a discrepancy.

Where the agreement creates separate payment obligations, a claim for each missed payment may accrue when that payment becomes due and remains unpaid. Different claims or applicable exceptions may produce different deadlines.

Contractual notice and audit provisions may impose additional requirements, subject to their terms and enforceability.

Dated statements, correspondence, production reports, and accounting records can establish the history of the alleged shortfall. These materials may also help determine whether a contractual payment remains outstanding and which filing deadline applies.