The success of the oil and gas industry should speak for itself. And the result however, has been very low product prices. As mineral owners, we know that the trade-off is there are a lot more mineral owners sharing a lot more royalties, but to recognize that when prices fall by 50%, our income follows. Unfortunately, it often falls more that the price. This is a product of the mineral owner being forced to be, for all practical purposes, a working interest partner with the oil company.
That means two serious issues exist. One is that the mineral owner who has post-production expenses deducted may see an ever decreasing slice of the pie. Are expenses being creatively calculated to benefit the operator at the expense of the mineral owner? We need legislation to prevent any mineral owner from getting less than 1/8th the proceeds from a well. It is insane to see post-production expenses exceeding 50% but that is regularly happening I am told.
The other issue looms before us. Bankruptcy. There will be a bunch of smaller companies that go under soon. They cannot survive $50 oil no matter what the pundits say. When an operator goes bankrupt, will your interest be preserved? If the past is key to the present, no is the answer. You may even be asked to refund the previous six months income back to the bankruptcy trustee. Can you do that?
We need to be protected. We OWN that oil, and should have secure access to OUR portion of the proceeds. When a big energy hedge fund –SemGroup – crashed in 2009, it also took down the arm of the company that did transportation and royalty management for companies. Hundreds were impacted and did not get their royalty checks. You are exposed to this problem from the first buyer, the intermediary or transporter (like above), or the operator and / or partners in a well. I fear many royalty owners are going to see significant disruptions to their royalties. They may recover some of it, but chances are they will be out legal expenses at a minimum, and perhaps be forced to take a haircut by the bankruptcy court. I remember being caught up a bankruptcy once and after seven years, my loss of $8,000 was 100%. My portion of the left over money was less than the registered postage to mail back the claim to the court.
Now is the time to buttonhole your representative and try to lay out the issues. We need protection.