What Should a Landowner Do if They Feel They're Being Underpaid on Royalties?

From Gas & Oil:

Many landowners receiving Utica Shale royalties are seeing large, unexpected deductions from their royalty checks. These deductions are usually described in an accompanying royalty statement from the producer. These royalty statements are oftentimes very difficult to read, use language that landowners do not understand and frequently omit critical information. This leaves landowners in a position of not knowing what these deductions are for and whether they are appropriate. 

Landowners considering challenging their royalty payments and deductions should first retain the services of an experienced oil and gas attorney to guide them through the audit process. Another important first step is to attempt to organize with other landowners who also own acreage in the drilling unit from which royalties are being paid and deductions are being made, because a drilling unit is a single economic unit sharing many common characteristics, such as production and cost data. Also, the audit cost can be shared pro rata by participating landowners. 

Typically the next step would be to retain the services of an experienced royalty auditor to conduct a royalty audit. There are many types of royalty audits, and they have different price points, depending on the level of detail. A Level One audit typically involves an analysis of royalty statements, drilling plats, lease documents, state production and completion records, published index prices and other information available to the public in order for the auditor to develop a conclusion about whether appropriate royalties are being paid and whether the deductions are appropriate. 

Armed with a Level One audit, the landowner’s attorney should be able to advise the landowners of their legal rights and remedies based on the lease documents. If it appears from the Level One audit that royalties were underpaid or there is an excessive amount of deductions, the attorney may advise the landowners to proceed with a Level Two audit that would be used in anticipation of potential litigation. A Level Two audit would involve a formal audit of the producer’s books and records relating to the payment of landowner royalties from the drilling unit in question. Such documents would include gas and oil sales remittance data and related contracts, production reports, title opinions and well cost reports.

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