I always counsel my clients to provide in their oil and gas leases that they have the right to inspect and copy all documents of the lessee necessary to determine whether royalties have been paid correctly, and to audit the records of the lessee to confirm accurate payment of royalties. Royalty owners generally assume that the royalty payments they received have been calculated and paid as required by their leases. This is not always the case, as illustrated by a recent case, Shell Oil Company SWEPI LP v. Ross, 2010 WL 670549 (Tex.App.-Houston [1st Dist.], decided February 25, 2010. The case illustrates typical schemes used by producers to underpay royalty owners, and their efforts to prevent royalty owners from knowing how royalties are calculated and, when the royalty owners discover the underpayment, to prevent royalty owners from recovering the underpayment.
In Shell v. Ross, the trial court and Houston Court of Appeals held that Shell had underpaid royalties due to Ross. Shell has appealed to the Texas Supreme Court. The Texas Supreme Court refused to consider the case, but Shell has filed a motion for re hearing that is still pending. Other producers are very interested in the case: friend-of-the-court briefs have been filed by Chesapeake, Texas Oil & Gas Association, and the American Petroleum Institute asking the Court to reverse the Court of Appeals.
The facts of the case require some explanation but illustrate well the importance of verifying the correct calculation of royalties.