Hello and thank you for taking time to read this. We recently learned of some inherited mineral rights that appear to have operating oil production on the property and I’m not sure where to turn. For starters, I have read about leasing rights and price per net mineral acre, but I still have specific questions so hopefully someone can help me out!
Are the leases that are signed year to year, multiple years, 20 years?
Does every lease have royalties associated with it?
What kind of dollar amount should the lease be generating?
For a new lease for an “exploratory well” what kind of terms should we look for from a lease and royalty perspective?
Sorry for such a wordy first post, but we are trying to learn on the fly as it appears a lease was already being worked on for a chunk of the property. THANKS!
Welcome to the world of mineral ownership. First, keep all paperwork associated with your minerals - deed, leases, division orders, check stubs, probate records, etc. - as you will eventually need this information. A lease grants the oil company the opportunity to explore and drill for a specified period (primary term). If a well is drilled, then the lease will be in effect until the production ceases from all wells. Many leases are in effect for over 50 years. So the terms matter. A lease will only have royalties if well(s) are drilled and produce. No guarantees that the lessee (oil company) will drill and if no wells are drilled,then the lease will expire at the end of the specified primary term. If you look at lease language, it will state that the lease is for a primary term of X years (best to limit to 3 years), and as long thereafter as there is production (or similar language). There are no guarantees as to the quality of any wells drilled - you can get a gusher or a tiny producer. This means that there is no guarantee as to the royalties you will receive. You should read some articles and research information on leasing. NARO (National Association of Royalty Owners) is a good organization which provides information and informative classes. NARO-Texas convention is in Austin in July 21-23 2019. This site provides answers to questions. TAMU (TX A&M) has articles such as this:
Lots to learn.
Thank you VERY MUCH! We can at least get a start on some basic understanding, because as you said, there is a lot to learn here and so much more for us to figure out… The more I read through the initial paperwork that we have received, it appears that there are 4 viable wells that are producing, to what degree I will need to find out more. The 5th area apparently has a pending agreement and is only waiting on the signatures from those that received “rights”. I will read through the information you provided and also, keep posting as I find out more info. Thanks again!
One quick question if you have time. So if a lease can be in effect for such a long period of time, is the lease paid, like any other lease? Annual payments? Or is it a one time payment and that is it? I have been reading quite a bit over the last few nights and it seems as though most, as you stated, are around 3 years. So to make it easy, if you have 100 acres, do you multiply a dollar value per acre multiplied by the number of years? I’ll open your attachment to read more as I’ll guess the answer is most likely in that document. Thanks again!
When you lease minerals, you are paid a bonus of $XXXX per net mineral acre. The lease will describe the gross acres of say 500 acres. But your share may only be 1/5 and so you own 100 net mineral acres. Generally, you will not receive additional money until a well is drilled and then you receive royalties at the rate in the lease. If the well is drilled on the 500 acres and you own 100 NMA and the royalty is 1/4, then you will receive 100 NMA/500 Gross Ac X 1/4 = 0.05000 X sales. If you own only 1/10 of the minerals (50 NMA), then your royalty decimal will be 50/500 X 1/4 = 0.025. So you will be paid less. If the sales from the well are $10,000 and your decimal is 0.025, you will receive $10,000 X 0.025 = $250. Many people own very small percentages of the minerals as the number of owners increases from generation to generation. If Grandpa owned 100 acres and had 10 children, then each only gets 10 acres. If child A has 5 children, then each will get 1/5 X 10 = 2 acres. You need to learn how many net mineral acres you own.
If you have producing wells on some tracts, then they are under lease and your royalty decimal will depend on the lease royalty rate (1/4 or 3/18 or 1/8) and your net share of the acres in the well. It is unclear what you mean about the 5th area and its ‘agreement’. Is this under lease with a new well? Or are you waiting for a lease? If it is already under lease and there is a new well, you will receive a division order from the operator which will state your royalty decimal. Be sure that you understand what you sign as it is a legal document and you will be bound by the terms and provisions. There are some untrustworthy people in this business (as in so many areas) and they may propose a lower royalty rate than normal or have you sign a sale document rather than a lease.
I also am going to encourage you to join NARO-US and the Texas Chapter, NARO-TX. Attend their Convention and seek the Mineral Management 101 class. They can all be found at www.NARO-US.org.
Soak up all the knowledge you can, but make sure you consider the source. They guy at the donut shop may not know a thing about oil and gas, except that his truck uses more oil than gas. NARO and organizations like it bring in professionals to speak and educate attendees.
Good luck in navigating the ins/outs of this industry! I hope you always have favorable returns.
A lease and the payments associated with it can be written in as many ways as there are people and attorneys; but, IMO, generally speaking, oil leases are different than most other business type leases. Again, generally speaking, an oil lease will be a one time payment (called a bonus) for the number of mineral acres for the specified time period of the primary term. For example, $1000 per acre times the number of acres (100 mineral acres) = $100,000 for a specified period of say 3 years or even 5 years. Many leases have a primary term (3 years) and then another secondary term of say 2 years if they so choose to keep the minerals under lease. The secondary term payment is another one time negotiated bonus amount.
Remember that we are talking about Net mineral acres and doesn’t necessarily have anything to do with the surface acres.