What is a Mineral Lease Bonus?
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 use LandGate to find out what your minerals are worth. Now that LandGate has offered you a third-party evaluation for what they should be paying to lease your oil and gas mineral rights, you have the power to turn down low-ball offers.
It is advised that mineral rights owners work with licensed attorneys or a landman in negotiating oil & gas lease terms. The oil company is usually willing to increase the lease bonus OR the lease royalty...but not both.
A 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 of 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 $160,000 lease bonus check 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.
What is a Lease Bonus?
The lease bonus is a one-time payment made to you, the mineral owner, on a per-acre basis at the time the lease is signed.
What is a Royalty?
The Royalty is a percentage of the proceeds from the sale of production paid monthly to the Mineral Owner.
Historically, royalties retained by the Mineral Owner in lease agreements have ranged between 12.5% to 25%. Â The lower the royalty you retain in the lease, the higher the net revenue retained by the operator. Â As an example, if you retain a 25% royalty, the operator could pay 100% of the cost to drill, complete, and market the production and retain 75% of the revenue interest. If you retain a 12.5% royalty, the operator retains 87.5% of the revenue and recovers its investment much faster. Operators certainly prefer to drill on leases with a lower royalty. Â So, accepting a lower royalty and taking more cash in a lease bonus could increase the chance your minerals get drilled.
Some mineral owners could receive a much higher lease bonus if they retain a lower royalty. An oil & gas royalty is only received IF a well is drilled and IF it is completed as a producer. If a well is drilled and is a dry hole, or if a well is never drilled, the mineral owner could be very happy to have received a higher lease bonus.
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 to increase your negotiating power.
How can I tell if my mineral lease is dead and I can sign a new lease?
It is important to understand the terms of your mineral lease and make sure the operator isn’t bending the rules, so to speak, and trying to claim that your lease is still active.
Since lease agreements generally require a producing well to hold the lease, the most important thing you can do is make sure that wells are producing on your property. If you stop receiving royalty payments from the operator, go onto LandGate’s website and follow these steps: Â
Locate your parcel on our map
Generate your free property reportÂ
If the wells have not been produced for a year or more, it is very likely that the mineral lease is no longer held by production and is now expired
Communicate with the operator and make sure the operator releases the lease back to you
Unfortunately, not all operators respond or ‘play nice’ when it comes to these contracts. Hiring an attorney is costly. The longer it takes to resolve the issue, the happier the attorney will be. As an alternative, you can sell your minerals and receive money for your assets while avoiding the headache of dealing with a non-responsive operator. There is no obligation to sell, so listing your minerals on LandGate’s platform provides you with options to make the best decision.
Oil and Gas Lease Amendment: What Do I Do?
An amendment to an oil and gas lease is a legal document that modifies or updates the terms of the original lease agreement between the landowner and the oil and gas company. This amendment can address various issues, such as changes to the lease duration, royalty rates, drilling locations, and the terms of the lease renewal.
If a landowner receives an amendment to an oil and gas lease, they should carefully review the document to understand the proposed changes and their implications. It is advisable to seek legal counsel to ensure that the landowner's interests are protected and that they fully understand the potential impact of the changes.
If the landowner agrees to the proposed amendment, they would need to sign the document and return it to the oil and gas company. If the landowner does not agree to the proposed changes, they may negotiate with the company to come up with a mutually acceptable agreement or choose to terminate the lease. However, terminating the lease may have financial and legal consequences, so it is essential to consult with a qualified attorney before taking any action.
How do I understand complicated terms in my lease agreement, PSA, or other legal documents?
Some common terms include:
Lease Bonus: A lease bonus is a one-time payment made to the mineral owner at the time the oil & gas lease is signed. The amount of the bonus is determined in negotiations between the Mineral Owner (lessor) and the lessee and is usually calculated on a per-acre basis.
Royalty Interest: Royalty interest is the portion of the net revenue interest (NRI) kept by a mineral owner (Lessor) when he/she leases the exploitation of his/her minerals to an Operator (Lessee). Upon the sale of oil & gas by the operator, a mineral owner will receive their proportionate share of royalty payments based on the royalty interest they own.
Working Interest: The share ownership as it relates to the cost of drilling and extraction of oil & gas.
Surface Use Agreement: An agreement between the mineral and surface owner that dictates the use of the surface for oil & gas development and exploration.
Pugh Clause: A Pugh Clause in a lease agreement limits the holdings of the operator from non-producing tracts of land after the primary term of the lease. The pugh clause can provide additional limitations on the operator such as depths below a certain zone.
HBP: Held By Production. A provision in the lease agreement that allows the lessee to continue operating activities on the tract of land as long as it is producing a defined amount of oil or gas.
Due Diligence: Before closing on the purchase, a buyer or lessee may choose to verify the title or additional assumptions that went into the accepted offer or sale agreement.
AFE: Authorization For Expenditure. An operator will distribute an AFE to its working interest partners with estimated drilling or completion costs for approval.
