Could someone please explain royalty payments to me. I’ve recently negotiated 19% royalty on an O&G lease of 5 years in Montana. Lets say for example a well produces enough for 1 million revenue after post production costs over 1 year. What would my payment be based off 19%? What if other heirs are involved?
You can only lease for what you own. Other heirs can lease their own net mineral acres.
Your royalty payments are based upon your net acres, the spacing unit, your royalty percentage and any other terms in the lease. So a general example, not to be taken literally, might be:
10 net acres/2560 spacing acres x 19% gives and equation of 10/2560 x 0.19=0.0007421875 decimal ownership. For every $1MM dollars in revenue, your decimal value might be $742.19 before taxes and post production charges. So the net is much smaller depending upon those extra charges. If your net acres are higher and the spacing acres are smaller, then the numbers will change.
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Texas based answer here, but I assume it is similar in Montana.
First, determine what type of well you are dealing with. Is it a tract well, pooled unit or a horizontal allocation well?
Each type of well has a similar but different formula. For purposes of this answer, I’ll assume it’s a pooled unit.
Pooled unit - we will assume the unit is 640 acres, you own an undivided 1/2 mineral interest under 80 acres and the entire 80 acre tract was included in the unit.
First step is to determine the tract factor, which is dividing the tract your interest is in by the size of the unit (80/640).
Then you multiple the tract factor by your mineral interest and lease royalty (80/640) x 1/2 x 19%.
This formula allows you to find your unit participation number. Once this number is found you can simply multiple it by the number of oil/gas produced by current market rates to come out with a rough estimate. Of course it’s impossible to accurately determine the operators deductions but it will get you in the ball park if your share.
Hope this helps!
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