Statutory Interest

Statutory Interest On Oil And Gas Payments

To schedule a free consultation, please call (303) 463-8799 or fill out our contact form.

Royalties on oil and gas payments need to be paid out within an explicit timeframe that is determined by the law in the state where the well is located. If an oil and gas company is late in paying out royalties or underpays them, some states require that statutory interest is added to the payment.

What Is Statutory Interest On Oil And Gas Payments
In the oil and gas industry, statutory interest is interest, required by law, that has to be paid when royalties, working-interest revenues, or taxes are paid late or underpaid. The amount of the interest rate, when it is required to be paid, and who receives it are all set by state statute.

Note that some states might call it something different (e.g. “interest on late payments,” or “penalty interest,” or “interest due by operation of law,” but it is still statutory, meaning that it is required by law.

What Is The Purpose Of Statutory Interest
Statutory interest is a penalty-style interest payment that is required by law when oil and gas payments are late or underpaid. It is designed to compensate parties that get paid late or incorrectly, and to incentivize operators and payors to pay on time and correctly.

Who Pays Statutory Interest
Typically, statutory interest is paid by oil and gas operators, first purchasers (payors), or sometimes working interest owners (depending on the division order structure).

Who Receives Statutory Interest Payments
If royalty and revenue payments are late or underpaid, statutory interest is paid to royalty owners, overriding royalty owners, and working-interest owners.

What Typically Triggers Statutory Interest
Below are the situations that commonly trigger statutory interest.

Late Royalty Payments: If an oil and gas operator misses the deadline for payment within a certain amount of days after first production or sale, statutory interest applies. The time period is determined by state law.

Suspended Funds That Are Released Late: If royalty payments are held in suspense (because of a title issue, owner that cannot be tracked down, etc.) and not paid promptly after the issue is resolved, statutory interest can accrue.

Underpayments: If royalty owners were paid, but less than what they were owed, statutory interest might be applied to the shortfall.

Incorrect Decimal Interests: If owners were paid using the wrong ownership fraction, and they receive too little money, statutory interest might be applied to the shortfall.

When Does Statutory Interest Start
The point at which statutory interest starts varies by state, but common triggers for statutory interest include:

• a fixed number of days after the first sale
• a fixed number of days after the month of production
• the date payment should have been made (NOT when the error was discovered)

How Is Statutory Interest Calculated
Statutory interest is simple interest or compound interest (depending on state statutes), and it is applied to the net amount owed. Generally, the amount of interest owed is calculated from the statutory start date through the payment date.

Reduced Legal, Audit, And Regulatory Risk
At ExTex, thanks to our experience and expertise, we can help you avoid statutory interest issues by preventing decimal interest errors, catching them early, and fixing them correctly.

We also handle suspense payments properly and release payments promptly when issues get resolved.

It is not easy complying with each state’s statutes, but our experienced team know payment timing laws, interest start dates, disclosures that are required on check detail, state-specific quirks, and more.

We are SOC compliant, and we maintain audit-ready documentation, in the event that an issue does arise.

Let’s Talk
Whether you have questions about statutory interest, would like to get a second opinion on the capabilities of your in-house team or outsourced company, or you need retroactive rework, we would be happy to discuss your situation and potential solutions.

For more information about statutory interest or other types of reporting and payments, or to schedule a free consultation, call (303) 463-8799 or fill out our contact form.

ExTex Division Order Services, LLC is located in the Denver metro area (in Golden, Colorado), and we provide back office outsourcing services for oil and gas companies across the U.S. and Canada.

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“Each member of the ExTex family is a subject matter expert who can provide quick solutions to the often complex details of revenue distribution and tax reporting.”

Mark B, VP of Finance, Texas

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