Royalty Owner Information Center
Mineral rights and royalty payments are difficult to understand and comprehend, but the North Dakota Petroleum Council and the oil operators of the state want to make sure that you have the resources to understand the process and what you can expect if you have mineral rights. Below are some frequently asked questions that should be able to answer, or assist you in answering, your royalty questions.
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1. What are the different types of oil and gas interests?
A royalty interest is the interest typically retained by a mineral owner in an oil and gas lease and is typically a fraction (such as “1/8th”) or percentage (such as “15%”) of the total oil and gas production attributable to the lease. A royalty interest is typically not subject to the costs of production but is subject to a share of gross production and oil extraction taxes and post-production costs. This interest is sometimes called a “landowner’s royalty.”
An overriding royalty interest is a cost-free royalty interest carved out of lessee’s interest under and oil and gas lease. Like a landowner’s royalty, an overriding royalty is usually not subject to the costs of production but is subject to taxes and post-production costs.
A working interest is the interest obtained by a lessee under an oil and gas lease. The owners of the working interest operate the property and pay for the costs of drilling, completing and operating wells on the lease.
2. What is "pooling"?
North Dakota law regulates the number of wells that can be drilled through spacing. Generally, only one well is allowed per spacing unit, although in some circumstances additional wells, which are also known as “infill wells,” may be allowed to be drilled on spacing units. Although not always the case, the most common spacing units for horizontal wells are either 640-acre spacing units or 1280-acre spacing units.
Since only a limited number of wells are allowed to be drilled on a spacing unit, North Dakota law insures that each owner of an oil and gas interest receives a fair share of the production from those wells. This is done through pooling. Pooling consolidates all of the tracts in a spacing unit and gives each tract a proportionate interest in the production from the spacing unit. For example, if a royalty owner owns a 1/8th royalty in the NW/4 of Section 1 and Section 1 is a spacing unit for a horizontal well, that royalty owner is entitled to 3.125% (1/8 X 160 Acres/640 Acres) of the production from the well. The working interest owners under that lease are responsible for 25% (160 Acres/640 Acres) of the costs of drilling, completing and operating the well.
Some oil and gas leases allow the lessee to pool the interests in the lease by filing a declaration of pooling in the county recorder’s office. Sometimes all the owners in a spacing unit enter into a voluntary agreement pooling the interests in the spacing unit. If neither of these methods of pooling occur, North Dakota law allows the North Dakota Industrial Commission to issue a “force pooling order” which consolidates all the interests in the spacing unit.
3. How is my interest in a well calculated?
Usually, the company proposing to drill a well hires an attorney to prepare a title opinion. That attorney either examines the public records in the recorder’s office or an abstract of title and determines who owns the minerals in each tract of the spacing unit and who has the working interest under any leases covering those minerals. The title attorney then calculates the interest of each royalty owner and working interest owner in the spacing unit based on those records and prepares a drilling title opinion.
Sometimes title to a particular interest is not clear. In such cases, the attorney requires certain actions to be taken to cure the title problem. Sometimes documents or affidavits are requested from the mineral owner or other knowledgeable persons. Sometimes estates must be probated or title questions must be cured through a quiet title lawsuit. Generally, it is the responsibility of each owner to take those steps necessary to “prove up” their title. Frequently, a mineral owner’s lessee or the operator of a well will help a mineral owner in determining what steps are necessary, but unless there is some other agreement, the mineral owner is generally responsible for curing title problems that affect that owner’s title.
This process of curing title can take some time to complete. Usually, royalty payments are “suspended” or held back until the title problem is cured.
4. What happens when a well starts producing?
After a well starts producing, the operator determines who is entitled to production payments from the well. Usually the operator will obtain a division order title opinion from an attorney that spells out who owns the production. Such an opinion is based on the drilling title opinion but contains greater detail on who is entitled to be paid for production from the well and what curative may be required for any title problems. Sometimes a company will prepare its own division order without waiting for a division order title opinion, but this generally depends upon the complexity of the title and the resources available to the company. Depending upon the complexity of the title and the ability to hire a qualified attorney to prepare a division order title opinion, this process can take some time to complete.
After the ownership of the production is determined, a division order is prepared. A division order is an instrument executed by the operator, the royalty owners, and any other person having an interest in the production directing the purchaser of oil or gas to pay for the products taken in the proportions set out in the division order. Under North Dakota law, royalty payments may not be withheld simply because a royalty owner has not signed a division order and a division order may not alter or amend the terms of the lease. However, in many cases signing a division order may be one easy way of curing a title problem. In those cases, signing a division order may result in the payment of royalties that otherwise would be suspended. While a division order is binding after it is signed, it can be revoked at any time.
The company paying royalties will need the social security number or tax identification number of the person being paid royalties. If such a number is not provided, Federal law requires a substantial tax withholding to be made.
Depending upon the circumstances and the agreements between the relevant parties, royalties may be paid by the purchaser of oil and gas, by the operator of a well, or by each individual lessee included in a well. To determine who is responsible for the actual payment of royalties, you should contact your lessee.
5. When are royalties paid?
The payor usually tries to begin payment of royalties as soon as the ownership of the royalties is determined. Although every company may have slightly different practices, royalties are usually disbursed monthly and checks are written and mailed around the twentieth of each month. Royalties on oil production are generally paid in the month following production while royalties on gas production are generally not paid until the second month following production. In some cases, royalties below a certain minimal amount may be disbursed semi-annually or annually.
6. Doesn't North Dakota law require interest to be paid on late royalty payments?
North Dakota law does provide that if royalties are not paid within 150 days after oil or gas is marketed, the unpaid royalties then bear interest at the rate of 18%. However, this provision does not apply if there is a dispute of title which would affect distribution of royalty payments.
7. Why does my monthly payment vary?
Many factors affect your monthly payment. These can include market conditions, regulatory or contractual changes, increases or decreases in production rates, seasonal conditions, and downtime on a well. Because accounting for oil and gas production is very complicated, it is also very common for there to be adjustments to payments for prior months. These prior period adjustments can be confusing, but are a necessary part of your payor’s efforts to accurately account for all of your royalty payments.
8. Why does my payment differ from other members of my family?
This may be due to any number of factors, including differences in ownership, differences in lease provisions, ownership of interests in other properties, or interests being suspended because of title problems.
9. What does it mean to have an interest "suspended"?
For the protection of all the parties involved, payments are suspended, or withheld, upon notification of a title dispute or any issue that affects the title. These issues may be addressed by the examining attorney rendering the Division Order Title Opinion or may occur throughout the life of the well. Once the title dispute or issue is resolved, the funds are generally released and paid to the proper owners.
10. What are the most common reasons royalty payments are suspended?
Although there are many reasons why royalty payments may be suspended, the most common reasons include:
- ambiguities or discrepancies in deeds;
- uncertainties as to the identity of various owners in the chain of title;
- unprobated estates in North Dakota when interests are acquired by inheritance;
- unrecorded deeds or other conveyances in a chain of title;
Sometimes these problems can be resolved by signing a division order or a stipulation of interest or furnishing an affidavit from a knowledgeable person. Some problems may require either a probate action or a quiet title action to be completed. If you have questions about how to resolve a title requirement, you should contact a North Dakota attorney.
11. How do I prevent delays in receiving my royalty payments?
If you are not sure that your interest is accurately reflected in the county records, or you may have had recent changes in your ownership, take steps to ensure your interest is accurately recorded in the county records. If you believe you are an heir of somebody who has died, make sure the estate has been properly probated in the state of North Dakota.
12. Who do I contact if I have questions about my royalty payments?
Each company has different policies and procedures and there may be a wide variety of facts which affect any one situation. The North Dakota Petroleum Council has attempted to obtain contact information from its members and other oil and gas companies and include it on this webpage. You should first try contacting the current lessee of your oil and gas lease, if known, or the operator of a well on a spacing unit that includes your interest. If you do not know the name of the operator of a well in which you believe you own an interest, that information is available from the North Dakota Department of Mineral Resources’ webpage.
13. What information do I need when I contact a company?
When you contact the company, it would be very helpful to have as much of the following information as is possible:
- Your name and address;
- Your owner number and/or lease or property number if one has been provided to you;
- The name and location of the well in which you believe you have an interest;
- The legal description of the property in which you own an interest;
- The name of the lessor and lessee and the date of the lease covering that property;
- If your question concerns a specific payment, the date of the check and a copy of the check detail;
- If you are claiming an interest in as an heir of an earlier owner, the name and address of the person from whom you believe you inherited the interest.
Depending upon the nature of your question, additional information may be required by the company.