How to Calculate a Royalty

Royalty check stubs can be confusing and impossible for the uninitiated to understand. In order for a mineral owner to calculate what their royalty payment should be, the mineral owner must determine their Net Revenue Interest (NRI) in the producing well. To do so, follow these steps:

Step 1. Determine the mineral owners interest in the spacing unit where the well is located. The mineral owner’s interest in the spacing unit is calculated by dividing the number of acres owned by the mineral owner within the unit by the total number of acres in the unit (Acres Owned / Total Acres in Unit). This will result in a decimal. For example, if the mineral owner owns 10 acres within the boundaries of the drilling and spacing unit and the unit contains a total of 640 acres, the mineral owner’s interest in the unit would be 10/640ths or 0.015625. The size of a drilling and spacing unit can be determined from records maintained by the Oklahoma Corporation Commission.

Step 2. Multiply the decimal calculated in Step 1 by the mineral owner’s royalty as set by the oil and gas lease signed by the mineral owner (or, in the case of a pooling, the royalty provision elected in the pooling action). If the mineral owner is entitled to a 3/16th royalty, convert this fraction to a decimal (0.1875) and multiple the royalty decimal by the mineral owner’s interest in the unit (0.015625 as calculated in Step 1). In this example, the mineral owner’s NRI is 0.1875 x 0.015625 = 0.00292969. In the case of a pooling, the royalty options are listed in the pooling order in the records maintained by the Oklahoma Corporation Commission. The pooling order will include a default royalty option in the event the mineral owner did not timely file an election for an option other than the default option.

Step 3. Multiply the mineral owner’s NRI as calculated in Step 2 by the total revenue produced by the well (Total Revenue x NRI). The result will be the revenue attributable to the mineral owner’s interest. For example, if a well’s production in a particular month was sold for $5,000 (production sales are normally reported to mineral owners on a monthly basis), the mineral owner in our example would be credited with $5,000 x 0.00292969 = $14.65. The total amount of the royalty payment should be $14.65 less the mineral owner’s share of taxes and certain operating expenses chargeable to the mineral owners.

In most cases, the operator of a well (or the company that purchases the product form the well if they pay the royalties directly to the mineral owners) have an owner relations department that is available to answer questions about your royalty payment. If you have questions about how your royalty payment is being calculated, a good first step is to call the owner relations department at the company that sends you a royalty payment; they should be able to provide you with the information necessary to check the calculation of your royalty using the information provided in this article.