Thanks for any insight on this topic. We were recently presented with a 18 percent contract at wellhead production. Trying to understand what that means and if production cost from this point are substantial. New to this oil stuff and just need some info before going further with this. Is this what we are paid and what percent could be incurred in final production if it’s at our cost. Thanks.
Bill,
You are focused in the right place; royalty. If you were given a lease form read it carefully for vagueness about those things that can be deducted for transpiration, quality enhancement, etc. And note that the lessor has no authority over how the costs are incurred. Read the measurement and payment paragraphs accordingly and avoid averages given you by land agents wanting you to sign a lease. I've seen deducts in the Peaance Basin exceed 35% of the gross royalty but much less in the DJ Basin. The Las Animas Arch area (SE) has an infrastructure problem and transportation facilities will be added. And don't forget to deal with non-arms length sale transactions. Try to get a published market price minimum if you can.
The location and the financial capabilities of the operator will help or hurt the well head royalty revenue calculation. Since you are wisely not making decisions based on bonus alone, check the contract for arbitrary deductions and focus on the things you can monitor and audit. Once you sign a ease all control of the minerals is out of your hands. If you have big acreage, a lease may not be the best thing for you.