Deductions to Royalties from Oil and Gas by: Lee J. Morehead

If you have reviewed a royalty revenue statement you have probably asked, “Why are there all of these deductions?” Many mineral owners have recently asked this question which has brought the issue of royalty deductions to the forefront. The simple answer is taxes and your oil and gas lease.

Typically, Ad valorem, Conservation, and Severance taxes are deducted from royalties. Ad valorem means “according to value” and the percentage is decided by each local government. Conservation tax is levied by the Colorado Oil and Gas Conservation Commission and ranges from 0.7% to 1.5% of the value of the minerals produced. Severance tax is levied by the State and ranges from 2% to 5% depending on the value of the minerals produced.

Other deductions, such as pump overs, transportation, and pipeline tariffs to name a few, come from the oil and gas lease. Even if you did not personally sign a lease, a lease may still bind your minerals. Oil and gas leases generally “run with the land.” This means that the lease is binding on purchasers of land that include mineral rights even if the purchaser did not sign it.

If the lease does not include a provision regarding allowable deductions, law defines what deductions are allowed and which are not. Some states allow deductions for any costs incurred after the minerals are severed from the land, i.e., brought to the surface. Colorado is different and follows the marketable product rule. Deductions for costs incurred before the minerals are considered marketable are not deductible. If you have questions about deductions, you should review your oil and gas lease with an attorney.


Otis, Bedingfield & Peters, LLC provides a range of legal services throughout Northern Colorado. OBP has 15 attorneys spread across its two offices in Greeley and Loveland. For more information, contact Lee Morehead at  or call 970-330-6700 or visit

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