Instructions for Using Form Letter:
During James Holmes’s October 21, 2011 speech at the annual NARO conference in Long Beach, California, several attendees asked whether he had a form letter that could serve as a starting point for their own letter requests to producers about royalty calculations. With NARO’s website assistance, Mr. Holmes has provided a form letter downloadable in Word. These instructions explain how to use the form letter.
1. Consider sending the letter via certified mail, as doing so may encourage the recipient’s responsiveness and will serve as proof of your mailing.
2. The states have different laws on the extent to which royalty owners can request information from their producers. In Texas, for instance, a combination of statutes and case law generally supports royalty-owner requests for information about royalty calculations. Other states may have even stronger laws entitling royalty owners to such information. Also, if a lease or unit agreement entitles royalty owners to royalty-calculation information, the letter should expressly mention so.
3. Producers have an understandable interest in maintaining the confidentiality of the information they use to determine royalties. They use such information to make money for themselves and, accordingly, have a proprietary interest in it. Often, they will share the information only if royalty owners agree to a short confidentiality agreement, limiting the use of the information to a specific review and for a short time period. Sometimes producers will share the information only if royalty owners travel to one of the producer’s offices and view the information on site.
4. Match the requests to the specific hydrocarbons coming from the leases and units about which you request information. For instance, if the lease on which you receive royalties produces only oil and casinghead gas, then eliminate from the letter requests concerning gas-well gas.
5. The requests seek both general and specific information concerning royalty calculations. You may need to hire a consultant or oil and gas attorney, on a limited basis, to advise you on the specific information you receive in response to your requests. Alternatively, some producers have helpful representatives who can explain the specific information to you.
6. Information concerning casinghead gas, liquids-rich gas, or other gas requiring heavy processing is difficult to understand and requires much experience to review. These hydrocarbons involve plant processing, which not only yields elusive products on which royalties are paid (namely, natural gas liquids, condensate, and residue gas), but also provides essential field services for operating the hydrocarbon field. Consequently, plant processing’s role in operations injects much complexity into royalty calculations for processed gas. You likely will need a specialized consultant or lawyer to explain to you the information you receive concerning processed gas and related royalty calculations.
7. The monthly sampling of requested information – appearing in the form letter as “January 2012, May 2012 and August 2012” – should be random and should include months with cold, hot and temperate weather. Hydrocarbon production and royalty calculations thereon can change month to month, especially with weather fluctuations. The sampling should seek information about royalty calculations under these different conditions.
– James Holmes,
October 2011
Disclaimer: The form letter and accompanying instructions provide information about the law and about the oil and gas industry in order to help NARO members cope with their own legal needs. But this information not the same as legal advice – the application of law to an individual’s specific circumstances under a legal engagement. Neither Schmidt and Holmes LLP nor NARO are providing legal advice to any user of this information. Also, neither is establishing a legal engagement with any user of this information.