In this blog, we’re going to focus on leasing oil royalties and gas royalties – what they are and what they mean for land owners, in particular.
To begin with, it’s important to note that in most countries of the world, all mineral resources belong to the government, and this includes all valuable rocks, minerals, oil and gas found on or within the earth. Additionally, organizations or individuals in those countries cannot legally extract and sell any mineral commodity without obtaining an authorization from the government. In the U.S. and a few other nations, ownership of mineral resources was originally granted to the individuals or organizations that owned the surface, and these property owners boasted both “surface rights” and “mineral rights” – a complete private ownership known as a “fee simple estate.”
A lot of people we’ve spoken to ask if they should demand a higher gas and oil lease bonus payment or higher gas and oil royalties when negotiating an oil/gas lease…and that’s a great question. A lease bonus can be defined as a once-only payment received by the mineral rights owner when the lease is signed, while a royalty refers to a chunk of the proceeds following the sale of the production, regularly paid on a monthly basis to the mineral rights owner.
When negotiating a gas and oil lease with an oil company, what factors must a land owner consider, and how do they decide? In general, a company will make an offer, and if that is turned down, the company will usually be inclined to increase the lease bonus or the lease royalty – but not both. Furthermore, a lease bonus is going to be paid when the land owner signs the lease, guaranteed, while a gas and oil royalty payment will only be received if a well is drilled by the oil entity (and only if it’s deemed a “successful producer”).
Ten Cow Holdings Fun Fact: There may be a lot of money to be made in receiving monthly royalty checks, but there are no guarantees when it comes to receiving gas and oil royalty payments.
Indeed, we may talk more about an oil and gas mineral lease bonus in a future blog, but for now just know that negotiating the royalty interest in an oil and gas lease is critically important to the mineral owner and the oil company taking the lease.
Finally, is there a difference between oil royalty and gas royalty? Generally speaking, there isn’t. Most all leases provide the same royalty rate for oil and gas that are produced and sold – but what is different is the price received when one is looking to sell oil and/or gas. Operators might be receiving $38 per barrel of oil and $2.50 per mcf of gas.
Our goal at Ten Cow Holdings is to educate and inform mineral rights owners. We can help when an interested party reaches out regarding leasing or buying mineral rights…just call (210) 960-1564.
