What does it mean to take royalty in kind?

Taking in kind means receiving your royalty share as physical oil or gas, which you then market and sell yourself, rather than receiving a cash payment based on the operator's sale. Because there is no proceeds calculation, there is nothing for post-production costs to be deducted from, which is the main reason anyone considers it.

Can a royalty owner take royalty in kind?

Only if the lease says so. Many older leases give the option to the lessee rather than the royalty owner, which does the owner no good. Some carefully negotiated leases give the royalty owner the right on written notice. If the lease speaks only in terms of proceeds, taking in kind is not available without agreement. Read the royalty clause of the lease itself rather than the division order.

Is taking royalty in kind worth it?

Rarely, for an individual owner. You would need a pipeline interconnect or trucking arrangement, a sales contract, measurement and allocation you can verify, and enough volume for the fixed costs to make sense. For almost all owners the better route to the same goal is a no deductions or cost free royalty clause in the lease, which achieves most of the benefit without requiring you to market a commodity.

What are post-production costs?

The costs of getting produced oil or gas into saleable condition and to the point of sale: gathering, compression, dehydration, treating, processing and transportation. Depending on the lease language and the law of the state, an operator may deduct a share of these from royalty before paying. They are the single largest source of royalty disputes in the United States.

Taking Your Royalty In Kind: What It Means and Who It Suits

Taking in kind means receiving your royalty share as physical production, which you then sell yourself, instead of receiving the operator's calculation of your share of their sale. The whole point of it is control over the sale, and therefore over the deductions.

Why anyone would want to

Almost every real motive comes back to post-production costs.

When your royalty is paid on proceeds, the operator sells the production and pays you a share of what came back. Depending on your lease and your state, they may first deduct the costs of getting the product to a saleable condition and place: gathering, compression, dehydration, processing, transportation. Those deductions are the largest single source of royalty disputes in the country, and on gas they can take a meaningful share of a check.

If you take the product in kind at the wellhead or at the tank, you own the molecules. There is no proceeds calculation for anyone to deduct from. You then bear the actual cost of doing something with it, which is the catch and is not a small one.

A second motive shows up in gas markets: an owner who can access a better sales point than the operator's contract, or who wants exposure to a different index, can occasionally do better than the operator's netback. That is a real business rather than a hobby.

What it actually takes

This is where the idea usually stops, and it should.

A place to put it. Oil at the tank battery has to be trucked. Gas has to enter a pipeline, which means an interconnect, a nomination, and a contract with the gatherer.
A buyer and a contract. You are now a seller of a commodity, with the credit, scheduling and imbalance obligations that come with it.
Measurement and allocation. Somebody has to measure your share separately, and you have to be able to check that they did it right.
Notice, usually well in advance. Leases that grant the right typically require written notice and a minimum period before an election takes effect, and often restrict how often you can switch.
Scale. The fixed costs do not care whether your interest is large. Below a certain volume the arrangement costs more than the deductions it avoids.

Which is why in practice, as one long standing description of the royalty clause puts it, the operator sells the product and pays royalty on proceeds. Modern production usually travels miles down a gathering system before it is sold at all, and physically taking delivery at the lease is no longer a normal thing to do.

Do you even have the right?

Read the royalty clause of your lease, not the division order. Three patterns are common:

The lessee's option. Many older leases give the operator the right to pay in kind or in cash, at their election, not you. This is the most common version and it does you no good.
The lessor's right. A lease negotiated with attention will sometimes give the royalty owner the right to take in kind on notice. This is the version worth having.
Silence, or proceeds language only. Then your royalty is a proceeds royalty and taking in kind is not available without agreement.

Federal onshore and Indian leases have their own history here, including a period in which the federal government took a portion of its own royalty in kind rather than in value. That is a separate regime from your private lease and does not create a right for you.

The version that is actually worth your time

For nearly every royalty owner, the useful lesson from take in kind is not to do it. It is to negotiate the cost question directly in the lease, where it is far cheaper to win.

A well drafted no deductions or cost free royalty clause gets you most of what taking in kind was meant to achieve, without you having to become a gas marketer. Ask for royalty calculated on gross proceeds at the point of sale with no deduction for gathering, compression, dehydration, treating, processing or transportation, and say it that specifically, because a general phrase gets read narrowly.

If you are already leased and already being deducted, the questions are whether your lease permits it and whether your state's law and case law allow it on those terms. That is a lease reading exercise, and it is one we will do for you at no charge. See the royalty statement decoder for how the deductions appear on a check stub, and royalty payment laws by state for what your state already requires on timing, interest and statement detail.

If you are considering selling instead

Worth knowing: a buyer values your royalty net of the deductions you actually bear. So a lease with a real no deductions clause is worth more than an identical lease without one, and it is a specific thing to point out in a negotiation because a data driven offer will not have seen it.

Send us your lease and your last check stub.

We will tell you whether you have a take in kind right, what is being deducted, whether your lease permits it, and what the interest is worth as it stands. Free, no obligation, and we will tell you plainly if the answer is that nothing is wrong.

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Berlin Royalties is a mineral buyer and a landman shop in Tulsa, not a law firm. Whether post-production costs may be deducted from your royalty depends on your lease language and on the law of the state where the minerals sit, and the states differ sharply. This page is general information, not advice about your lease.

Taking your royalty in kind