Earning royalties for having oil on your land is both an easy and lucrative way to make money. You don’t have to extract the oil yourself, but simply let the company that’s purchased those rights perform such tasks, while you get a portion of the income derived from it.
Back in 1982, the federal government passed legislation that established those royalty recipients would receive no less than 12.5 percent of any sales of oil and gas from the leases.
The standard expenses are deducted for such things as exploration and drilling, which are hopefully followed by production and marketing.
However, in an attempt to avoid (or at least limit) the amount of such payments, some oil companies add questionable expenses that they claim are related to the extraction process. In many cases, that practice becomes perfectly legal since the person signing it failed to read the fine print.
Ethically Questionable Practices
Still, in some instances, companies secretly calculate such amounts that include unauthorized expenses that aren’t disclosed to a land owner. While these expenses are usually documented when a transaction is between two energy companies, this practice rarely occurs for individuals involved in a transaction.
Another shady practice is for a company to set up their own subsidiary company and sell them the oil at a reduced price. The subsidiary then resells it as a higher price, which gives the company its full benefit. However, it ends up cheating the landowner since their royalty is based on the first transaction.
The victimized landowner must usually take their case to court to receive justice, especially in the case of determining the calculations used. These can be determined during the standard discovery process, which again shows the value of having a legal presence available.
Knowing what is Being Signed
In short, tricky legalities are used by oil companies after careful consideration by their legal team. They no doubt expect that many of the people who sign such leases will either not take the time to carefully read them, or simply lack the ability to fully comprehend what they’re signing.
Attorneys that have handled such cases before know what to look for within the often-lengthy contract that must be signed before any royalties begin. That’s why their knowledge can help a landowner get as much for their land as possible.