Understanding Oil and Gas Mineral Lease Bonus
At LandGate, our clients often ask if they should demand a higher oil and gas mineral 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. So, although this is a lease bonus discussion, let’s first review the main difference between receiving an oil and gas lease bonus payment vs an oil and gas royalty payment.
A mineral lease bonus is a one-time payment made to the mineral rights owner when the oil and gas lease is signed. Mineral 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 mineral 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. That’s when you need to contact LandGate to find out what your minerals are worth. Now that LandGate has told you what they should really be paying to lease your oil and gas mineral rights, you have the power to turn down low-ball offers. LandGate can assist you in negotiating oil & gas lease terms. The oil company is 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. So, there is a 100% guarantee you will be paid. 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. There are a lot of benefits to deciding to negotiate a higher oil and gas lease bonus vs a higher royalty. Let’s discuss how the lease bonus is calculated and some of the benefits to accepting a higher lease bonus.
Mineral Lease Bonus Calculation
The lease bonus is calculated on a dollar per net mineral acre basis. For example, if you owned a 50% mineral interest in a 640 acre tract, you would own 640 gross acres and 320 (640 x 50%) net mineral acres. If you agreed to a bonus of $500/net mineral acre, you would receive a lease bonus check in the amount of $160,000 when you sign the lease.
Higher Lease Bonus = Lower Royalty?
If you chose to receive a higher lease bonus for your minerals, then your oil and gas royalty could be lower than other mineral owners in the area who might have asked for a higher royalty rate. But that could benefit you. The oil company will drill where their economics are best. An example:
The oil company may decide to drill on your land because you have a lower lease royalty. If you reserved a 1/8th (12.5%) royalty in your lease and the offsetting landowner reserved at 1/5th (20%) royalty interest, the company will drill on your minerals. The reason for this is the royalty reserved in the lease. If they are going to pay $10,000,000 to drill and complete a well, they will want to recover their costs ASAP. If they drill on the offsetting landowner, they will only receive 80% of the revenue, as they reserved at 1/5th royalty. If they drill on you, they will receive 87.5% of the revenue from the sale of the oil and gas produced because you decided to negotiate a higher lease bonus and a lower royalty.
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 in order to increase your negotiating power.
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