Royalty Deductions

After negotiating your oil and gas lease terms, signing division orders and waiting for the operator to complete the well, you will receive your first royalty check. You might be surprised to see that a substantial portion of your royalty is taken from you in the form of “deductions.” These losses can add up quickly. Unfortunately, you may have a limited amount of time to enforce your lease terms, or you may lose your claim for recovery of past deductions, due to the statute of limitations.

Depending on the terms and conditions in your oil and gas lease, you may be able to recover wrongfully-taken royalty deductions. As a general rule, most Oklahoma oil and gas leases contain the implied duty to market. Under Oklahoma law, this means that the lessee may not deduct from your royalty payments the costs of fathering, transportation, compression, dehydration, or blending if those costs are required to create a marketable product. However, some leases contain language that allows the lessee to deduct these costs. This can result in a substantial loss of royalties. For this reason, we recommend that mineral owners always have an oil and gas lease offer reviewed by an attorney prior to signing.

If you are losing royalty payments in the form of deductions, you may have a claim against the lessee (the oil and gas company) to recover your deductions, in addition to other remedies. Determining whether a deduction is appropriate or not under the lease terms is a fact-intensive analysis. We have represented hundreds of Oklahoma royalty owners in the recovery of royalty deduction payments. If you are concerned about royalty deductions, you can contact us to discuss what options are available to you.