I hear various forms of this basic question from mineral owners on almost a daily basis.
One way to approach the answer is to breakdown the per barrel value and tax burden on a barrel of oil. The price paid for a barrel of oil is governed by the posted price which is often referred to as West Texas crude, or Henry Hub or many others. From this base price the oil companies are paid according to what their contract with the pipeline or transport companies allow. Some are based on the spot price and some pay a premium to spot while others are discounted. It is basically based on supply and demand. The better the demand for barrels the better the price relative to spot.
Then the purchaser or pipeline company determines the gravity of the oil. The higher the gravity, the better the BTU value, the better the price. Gravity adjustments are made at the wellhead and are reflected in your royalty checks. The pipeline company or transporter then determines the applicable severance taxes and also deducts that from your check totals and it can vary from 0% to 12.5% of fair market value depending on the state the production is located in. All of the above help determine what you are paid for your production but the government is certainly not through getting their share at that point.
You will then receive a bill from the county and perhaps school districts for ad valorem taxes on a county by county basis which will total an average of around 5% of the fair market value of your wells. The feds will then tax you on your income with up to 39.6% plus a 3.8% Obamacare add on) going to pay your federal income tax.
There is one bit of good news in that in most states you also have to pay state income tax as well but in Texas, provided that you are a Texas resident you have no state income tax. However, if you live in a state that does have state income tax you will have to pay state income tax on the production regardless of the fact that the production is located in Texas.
One last tidbit of information, you can actually recoop some of the above by claiming cost or percentage depletion on the production when you file your federal income tax.
After all the dust settles, I bet you are surprised to learn that oil isn’t worth near as much as you thought in Texas.
Find out more about selling and leasing your mineral rights in Texas.