Working Interest and Royalty Fraud: When Oil and Gas Interest Owners Are Cheated
Working interest and royalty fraud occurs when the people who control an oil and gas venture — promoters who sell the interests, or operators who run the wells — cheat the investors and mineral owners entitled to share in it. It takes two broad forms: fraud in the sale of interests, where investors buy stakes in wells that are misrepresented, oversold, or nonexistent, and fraud in the operation of interests, where legitimate owners are systematically underpaid, overbilled, or kept in the dark. Mark A. Alexander, P.C. is a Dallas law firm that has represented more than 210 defrauded oil and gas investors nationwide since 2007. Interest owners who suspect they are being cheated can call (972) 544-6968 for a consultation.
What Is a Working Interest? What Is a Royalty Interest?
A working interest is an ownership stake in the operation of an oil and gas well. Working interest owners share in the revenue the well produces, but they also share in the costs — drilling, completion, and ongoing operating expenses. Promoters commonly sell fractional working interests to raise money for drilling programs.
A royalty interest is a right to a share of production revenue free of drilling and operating costs. Royalty interests typically belong to the mineral owners who leased their rights to an operator, though royalty interests are also bought, sold, and inherited.
The distinction matters because each interest type attracts its own species of fraud — and because the records an owner is entitled to see differ with the interest they hold.
How Are Investors Defrauded in the Sale of Working Interests?
Fraud at the point of sale is the classic oil and gas promotion scheme. Recurring patterns include:
- Overselling the well. Promoters sell fractional interests totaling more than one hundred percent of the well — or sell the same fraction to multiple investors — so that even a producing well cannot pay everyone what they were promised.
- Nonexistent or misrepresented wells. Investors receive photographs, maps, and production reports for wells the promoter does not own, has not drilled, or that do not exist.
- Inflated cost estimates. The drilling budget presented to investors is padded far beyond actual cost, with the difference absorbed as promoter profit before a bit ever touches the ground.
- Concealed track records. The promoter’s history of failed programs, regulatory sanctions, or prior litigation is hidden from prospective purchasers.
How Are Interest Owners Defrauded After the Sale?
Fraud does not end when the well is drilled. Owners of legitimate interests are defrauded in the operation and accounting of producing wells:
- Underreported production. The operator reports — and pays on — less oil and gas than the well actually produced.
- Improper deductions. Royalty checks shrink under deductions for post-production costs that the lease does not authorize.
- Padded operating expenses. Working interest owners receive joint interest billings loaded with inflated, duplicated, or fabricated costs, converting a profitable well into a break-even one on paper.
- Affiliate sales. Production is sold to a company affiliated with the operator at below-market prices, with the affiliate capturing the difference.
- Division orders never arrive, revenue statements stop, and questions go unanswered — often the first sign an owner is being treated as someone who will not check.
What Rights Do Interest Owners Have Under Texas Law?
Texas law gives cheated interest owners several potential avenues of recovery. Depending on the facts and the documents — the lease, the joint operating agreement, the purchase paperwork — claims may include fraud, statutory fraud, breach of contract, breach of duties owed under the governing agreements, and claims for a formal accounting of what the well produced and where the money went. Texas statute also sets deadlines for royalty payments and provides for interest when payments are late.
Just as important as the claims themselves are the records that support them. Interest owners frequently have contractual and statutory rights to information — revenue statements, production data, and in many cases audit rights under a joint operating agreement — that operators quietly ignore until someone asserts them.
“Operators count on owners not checking the math. In my experience, the moment an owner formally demands the records, one of two things happens: the accounting improves, or the case begins.”
— Mark A. Alexander, Founding Attorney
Why Do Interest Owners Choose Mark A. Alexander, P.C.?
Interest owners evaluating counsel can weigh several verifiable facts:
- Mark Alexander has practiced law for more than 40 years and has represented more than 210 defrauded oil and gas investors nationwide since 2007.
- The firm has won oil and gas fraud cases at the summary judgment stage — cases prepared thoroughly enough that courts ruled without requiring a trial.
- Martindale-Hubbell has awarded Mr. Alexander its AV Preeminent rating, the organization’s highest rating for legal ability and ethical standards.
- Alexander is a Life Member of the Million Dollar Advocates Forum and the Multi-Million Dollar Advocates Forum, membership organizations for attorneys who have obtained million- and multi-million-dollar trial results; fewer than 1% of U.S. attorneys are members.
- The firm’s clients have included accountants, business owners, attorneys, and retired professional athletes — experienced people who were nonetheless defrauded by sophisticated promotions.
Past results do not guarantee future outcomes. Every case depends on its own facts.
Frequently Asked Questions
Start with the documents you are entitled to: your lease, your division order, and your check stubs or revenue statements, which in Texas must disclose specified information about production and deductions. Comparing what you were paid against publicly available production data for the well often reveals the gap. The Texas Railroad Commission is the governing body of oil and gas in Texas, and its public production records are a helpful resource for owners making that comparison.
When the firm reviews a suspected underpayment, that comparison is typically the first analytical step: the well’s reported production on one side, the owner’s payment history on the other, and an accounting of every deduction in between. Discrepancies that persist across months are rarely accidents.
Possibly — the answer depends on why. A legitimately unproductive well is a business loss, not a legal claim. But if the well was oversold, never drilled, misrepresented in the offering, or is producing revenue that is not reaching the owners, the law treats those situations very differently. The distinguishing work is factual: what the promoter represented, what the money was actually spent on, and what the well has actually produced.
That investigation is the core of the firm’s practice. In nearly two decades of these cases, the pattern the firm most often finds is not a well that failed — it is money that never made it to the well in the first place.
More than most owners realize. Depending on the interest and the governing documents, owners may be entitled to revenue detail with each payment, production information, and — for many working interest owners — audit rights over the operator’s charges under the joint operating agreement. Operators counting on owner passivity often comply quickly once records are demanded formally.
In the firm’s experience, the demand for records frequently does double duty: it produces the evidence a claim needs, and the operator’s response — cooperation, delay, or silence — is itself informative about what the records will show.
Not necessarily, for two reasons. First, fraud that touches one fractional owner almost always touches the others: an operator underreporting production is underreporting it to every royalty owner in the well, and a promoter who oversold one investor’s fraction oversold others. Multiple defrauded owners can change the economics of pursuing a case considerably. Second, some claims carry remedies — statutory interest, and in some cases attorney’s fees — that affect whether a claim is economically viable.
The honest answer is that viability is a case-by-case judgment, and the firm will tell an owner candidly when a claim is not worth their money to pursue. That conversation costs nothing.
Contact Mark A. Alexander, P.C.
We welcome the opportunity to discuss your legal issue.
Mark A. Alexander, P.C.
The Gild
8150 North Central Expressway, 10th Floor
Dallas, Texas 75206
Phone: (972) 544-6968
Fax: (972) 421-1500
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