Understanding Oil and Gas Royalty Calculations

Receiving Oil and Gas Royalty Payments

A landowner who leased their land for shale production will receive royalty payments for any oil and gas extracted from his or her property. A common practice for payment to landowners is known as a "division order." A division order is a communication between the mineral owner from the producer after a drilling unit is established and a well is drilled.

A tutorial on division orders through the American Royalty Council can be accessed by clicking on the image below:

The royalty payment will reflect the proportion of oil and gas produced from a landowner's property. A landowner receives a percentage of the royalties produced from the entire drilling unit relative to the amount of acreage he or she owns in the drilling unit. This is known as a "decimal interest." The decimal interest is detemined by the following equation: 

(Owner's acres / Unit acres) x Royalty %

For example, if a landowner owns 10 acres out of a 100 acre drilling unit and received 1/8 royalties, the landowner's decimal interest would be detemined as follows: 

(100 / 10) x 1/8 = 1.25 

In this example the landowner's decimal interest is 1.25; this will be the landowner's share of production from the entire drilling unit.

Pennsylvania State University Extension Shale Webinar Series: Reading Royalty Checks

Penn State Extension offers a recorded webinar to assist landowners in reading royalty checks.The webinar  features Steve Karabin, Sr. VP/ Marcellus Minerals Asset Advisor, Clermont Wealth Strategies and Jackie Root, Owner R&R Energy Consulting LLC, Certified Mineral Manager, Member of National Association of Royalty Owners Board of Directors.

The recorded webinar can be accessed by clicking on the image below:

Pennsylvania State Extension Fact Sheet Series

Natural Gas Exploration:
A Landowners Guide to Financial Management