When a drilling company signs a lease to drill on someone’s privately owned land, the land owner is entitled to a percentage of the total value of produced material called a royalty. Federal Laws have passed that require drilling companies to pay no less than 12.5% in royalties of oil/gas sold from the lease. This is in place to protect the landowner from being “tricked” into getting practically nothing from the sale of the oil/gas obtained from their land.
Land owners in oil rich areas have been promised riches from allowing companies to drill on their land. While there have been countless leases signed, and thousands of wells all over Texas, oil companies have taken to manipulating costs and other data, leading to the withholding of billions of dollars in projected royalties from the landholders.
One way oil drilling companies are getting away with not paying the full amount of royalties due the landholder is by using complex calculations companies which allow them to skim profits off the top by disguising them as marketing and sales costs, even though they are using the oil themselves to power their own equipment, meaning no marketing or sales expenses were necessary. Sometimes the oil is “sold” to the driller’s subsidiary companies at extremely low prices, reducing the amount that can be claimed by royalties. Costs of these sales are being deducted from landowner’s royalties and they are generally only documented in private transactions between companies and never disclosed to the landowners. Another way oil companies lower the amount required to pay to the land owners is by setting up “limited Partnerships” with whom they sell their oil at a very low cost, then turn around and sell the oil from that company to buyers at full market price. The royalties, in most cases, are only calculated from the 1st sale of the oil. And yet in other cases, Companies have made deals completely off books which hides the full value of what was sold to the landholders.
In many cases, landowners find themselves in a position where they have to file a lawsuit and use a legal process called Discovery to be able to look at these costs, and the transactions between the companies to ensure the proper costs have been deducted. Many leases are written with clauses that do not allow landowners to audit the oil company’s books, and even the landowners that can perform these audits often have to spend thousands to do so. Then, when audits find evidence of incongruity, leases in some states require that these findings be submitted to arbitration, which is another costly, and lengthy process used to delay lawsuits even further.
These practices even take place when drilling oil on government land, reducing the amount of royalties paid to the federal departments that own the land. The difference is that the government has seemingly unlimited resources to combat these practices, and take the oil companies to court at the first hint of unethical behavior. These resources include rules The Dept. Of Interior use to manage what types of deductions from royalties are allowed, and an auditing agency that is employed specifically to audit the books of the drilling companies for errors and unlawful deductions. In the past 30 years, these auditing agencies have uncovered, and recouped nearly $4 billion in royalties nationwide.
Some land owners, are not so lucky. With proper representation, however, many private land owners have been able to fight unethical practices such as complex accounting which leads to confusing details about where the money that has been deducted from royalties has been spent and been able to recoup their losses.
If you have leased land to drilling companies and are unsure that you are getting the royalties that you are owed, the 1st step in any investigation is to obtain legal counsel like the services offered at Carabin Shaw. Contact us day or night, 7 days a week for a free consultation. 800-862-1260