Part 1: Little-Known Truths About Louisiana Royalties Due Under Risk Fee Statutes
Updated: Mar 1, 2019
The majority of Louisiana royalty owners do not know about what is called Louisiana Risk Fee Royalties. As a division order analyst who handles North Louisiana producing properties for an exploration and production company in Houston, I have first-hand knowledge of what I’m about to tell everyone here. Those who already know what Risk Fee Royalties are can ignore the next paragraph which explains them.
Louisiana statutes require all owners of leases (known as the Lessee) to pay their share of the costs of drilling, completing, and producing new wells that include (have pooled) oil and gas leases that they own. There are royalty owners who are entitled to royalty payments under those leases when they start to produce. The risk fee statutes require any leasehold owner (Lessee) to pay up those costs before the well is spud (“participate in the well”) or to opt out and let the company drilling the well (operator) pay those costs on behalf of the non-participating leasehold owner. But if the driller (operator) pays on behalf of any opt-out Lessee, Louisiana’s Risk Fee Statutes allow the driller to recoup those costs out of future production revenues that otherwise would have been paid to the opt-out Lessee. Anywhere from 100% to 300% depending on the category of the well. What about royalty owners, you ask? Doesn’t the driller have to pay those royalty owners on behalf of the opt-out Lessee? Yes, and no. The law says the driller must pay over to the opt-out Lessee the total amount of royalties due under that Lessee’s leases. It is the responsibility of the Lessee to take that money each month and pay it out to their royalty owners. The driller has no legal obligation to pay any of the opt-out Lessee’s royalty owners directly. The driller is required only to pay that money over to the opt-out Lessee, then the opt-out Lessee is on the hook to pay it out to owners.
That leads me to discuss some of the most common ways that too many Risk Fee royalty owners never get paid what is due to them. Most of them don’t even know they are not getting paid everything. Far too many owners aren’t being paid anything at all and don’t know they are owed anything.
Reason No. 1:
The opt-out Lessee does not have the staff or the computer software necessary to distribute to their royalty owners what the driller is paying to them each month. I have a mantra that goes something like, “if you’re going to play the game, you had better follow the rules.” Any company that wants to make money owning partial interest in an oil or gas well in Louisiana but doesn’t invest in hiring the staff and installing the computer software necessary to conduct their business properly have no business being in the business! Even as I write this, I can name at least two tiny companies right now that are being paid Risk Fee Royalties but those companies are sitting on that money and not paying it out to royalty owners as required by Louisiana law.
How do I know this? Because the company I work for is the one paying them the Risk Fee Royalties each month, and for the past year those companies have been begging my company to just distribute that money directly to their owners—to stop paying them and pay direct. My employer cannot do that without incurring a huge amount of financial liability.
The biggest reason for liability has to do with knowledge of title ownership. How does the driller know for sure who is entitled to part of those royalties? Just because the opt-out Lessee says so? Oh, no, it doesn’t work that way. Hundreds, even thousands, of dollars are spent researching deed records and other records at the courthouse to find out who the owners of mineral rights are, under the lands to be covered by a lease. The opt-out Lessee was supposed to hire out all of that work to be done, but too many times the researchers don’t do a good job, so lots of mistakes routinely are made paying out royalties.
As a division order analyst with over 40 years of experience, I have seen countless times that the wrong person or people were paid in a well only because the research work wasn’t done right at the courthouse. When that happens, the correct people have to be paid everything they are owed. Then, good luck trying to get any of the money back that has been paid to the wrong people for months—or even years—because in Louisiana the law is on the side of the royalty owner, even when they know they weren’t supposed to be getting that money. But most of the time, those folks truly didn’t know they didn’t own the mineral rights—they believed they were entitled to that money.
If these royalty owners aren’t even the driller’s royalty owners because the driller doesn’t own any part of the opt-out Lessee’s leases, why would any driller in his right mind take on that amount of financial liability? And there’s no way to recoup the cost of the driller going to the courthouse to research the opt-out Lessee’s leases for mineral ownership. Louisiana law doesn't include that as a cost that can be recouped under the statutes.
It’s the royalty owner that gets left standing out in the cold.
Come back next week to learn the second most common reason royalty owners don’t get paid if they own royalties under leases held by an opt-out Lessee in a new well.