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Can oil and gas companies reduce your royalties?

When you sign a lease agreement and an oil and gas extraction company begins drilling on your land in California, you expect your percentage of the royalties to be consistent with sales. However, according to ProPublica, many large companies have developed ways to withhold money that rightfully belongs to landowners, and they are often successful because of a lack of disclosure laws and accountability measures.

Your lease may have provisions describing how expenses may be deducted. Auditors investigating expense claims assert that many companies use these to reduce the amount paid without providing an explanation of what the expenses are. While some leases are written in confusing language that ultimately allows companies to deduct costs, some do it even when the lease specifies that they may not.

Another way that energy companies manipulate the royalties they pay is by setting up subsidiary companies. They can then pay themselves to gather, transport or process the extractions, and sell the product to themselves at a very low profit. Then they can resell at a much higher price. In this scenario, you would be charged for the expenses, and the royalties would be paid only on the first sale, cheating you out of much of your rightful earnings.

Large companies may also keep the oil and gas rather than selling it and use it to run their operations at locations throughout the country. Companies have been known to trade product for services, as well. In both of these scenarios, since your oil or gas is not sold, there are no royalties. This information is provided to educate you about some of the issues that landowners face with their oil and gas extraction leases. It is general in nature, though, and should not be interpreted as legal advice.

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