Understanding Oil & Gas Mineral Royalties

Understanding Oil & Gas Mineral Royalties

At LandGate, our clients often ask if they should demand a higher oil and gas lease bonus payment or a higher oil and gas royalty when negotiating an oil and gas lease. That’s a great question. Not all mineral rights owners are in the same financial situation. Although this is a royalty discussion, lets first discuss the main differences between receiving an oil and gas lease bonus payment vs an oil and gas royalty payment.

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A lease bonus is a one-time payment the mineral rights owner receives when the lease is signed. Royalty is a portion of the proceeds from the sale of production which is paid monthly to the mineral rights owner. The royalty is usually described in the lease as a fraction such as 1/8th, or 1/6th.

When you are negotiating an oil and gas lease with an oil company, you may have to decide between a higher lease bonus vs a higher royalty. How do you decide? What factors do you need to consider? The company will make you an offer. If you turn them down, they are usually willing to increase the lease bonus OR the lease royalty…. but not both. These lease terms and others can be found here. But let’s answer a few more questions that always come up.

Lease bonus is going to be paid to you when you sign the lease. That is a 100% guarantee. As for receiving an oil and gas royalty payment, you will receive it ONLY IF the oil company drills a well and ONLY IF the well is a successful producer. Most wells drilled in a new area have only a 20% probability of being successful. There is a lot of money to be made in receiving monthly royalty checks. However, there is no guarantee you will ever receive an oil and gas royalty payment.

We will talk more about an oil and gas mineral lease bonus in a future post. But negotiating the royalty interest in an oil and gas lease is critically important to both the mineral rights owner and the oil company taking the lease.

Economics of Drilling a Well

Oil companies can easily spend $10,000,000 drilling and completing a well. One of the many factors taken into consideration when deciding to drill is economics. How long will it take for the operator to recover the cost of drilling and completing, also sometimes referred to as “payout”? How much money will the operator make from the sale of production over the life of the well? The royalty rate in the lease has a huge impact on the economics. The higher the royalty in the lease, the longer it will take to payout and the less the operator will make.

If the lease has a 1/8th (12.5%) royalty, that will result in the operator paying 100% of all costs and receiving 87.5% of the revenue. The remaining 12.5% would be the royalty interest in oil and gas paid to the mineral rights owner. If the royalty was 20%, then the operator would pay 100% of all costs and only receive 80% of the revenue. The higher the royalty rate in the lease, the longer it will take for the well to reach payout.

Royalty on Oil vs Royalty on Gas

Is there a difference between oil royalty and gas royalty? Generally, not. Most all leases provide the same royalty rate for oil and gas that are produced and sold. What is different is the price received for the sale of oil and gas. Operators might be receiving $38/barrel of oil and $2.50/mcf of gas.

Other Mineral Royalty Matters

Look out for blog posts on other important oil and gas royalty matters such as:

  • Reading your monthly royalty statements
  • Reviewing your Division Order
  • Is the operator deducting transportation and other fees before calculation your royalty payment?
  • Why are oil and gas royalty buyers offering to buy your oil and gas minerals?
  • Yes, you can sell your oil and gas royalties. And LandGate can make sure you get the best price.

At LandGate, we want mineral rights owners to be informed. Let us help you when you are contacted by someone wanting to lease or buy your mineral rights. LandGate wants to make sure you know the value of your mineral rights, whether or not you are receiving a monthly oil and gas royalty check.

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