Oil and Gas Mineral Rights
Learn the key terms in the oil and gas industry and how they impact mineral owners.
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An assignment is a legal instrument used to “assign” an interest or property to another person or entity. You can assign all or part of your mineral rights to another party. Assignments are commonly used for working interest and overriding royalty interest.
Associated gas, also called casinghead gas, is natural gas that is held in solution with oil or is in a gas cap above the oil. Associated gas is separated from oil at production or shortly thereafter.
A large-scale geologic depression in the subsurface that has the potential to contain oil and gas. Shale plays are located within basins.
A casing head is a steel pipe inserted into the borehole to prevent it from collapsing. Casing pipes are cemented into the area between borehole wall and steel pipe.
A clear title is a chain of title without liens or levies from creditors or other third parties. A clear title poses no question as to the legal ownership of the property and indicates the title holder is the rightful owner.
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. The price a mineral owner received for oil or gas is commonly referred to as the wellhead price. Wellhead prices are calculated using a posted oil and gas pricing index minus the cost of transporting it from the well to the market, where it is sold.
A decline curve is a method or estimated oil and gas reserves and predicting future production. Decline curves show the pace at which production is expected to decline over the lifetime of a well. Horizontal wells have a steeper and shorter decline curve than conventional wells, and therefore, will have a shorter productive life. This is why horizontal wells are typically valued at 3 years net revenue while conventional wells can be valued at 5 years of net revenue (depending on the age of the well and other factors).
A deed is a written instrument by which an owner transfers ownership to a real property to another person or entity.
A development well is an oil or gas well that is drilled a previously discovered field in a know producing formation.
A single well (or lease) will usually have multiple, if not hundreds of fractional owners. Division orders are legal documents sent to both royalty and working interest owners, ensuring each fractional owner gets their share of the hydrocarbon production. In most cases, division orders have to be reviewed and signed before mineral owners will be paid royalties.
A divided interest in real property indicates distinct ownership in a specific area. See also Undivided Interest.
Mineral owners have executive rights, meaning they can enter into an oil and gas lease. Occasionally, mineral owners will sell their interest but retain executive rights to the property.
Fee Simple Ownership
A fee simple ownership indicates ownership of both the surface of the land and the minerals interest below the surface. Minerals can be severed from the surface, beginning two distinct title chains.
Forced pooling is the right for a company to include adjacent land tracts in a unit, even if the owners do not want to lease or cannot be located. This right is granted by the state’s oil and gas regulatory body. Forced pooling is a significant issue in Oklahoma.
In a real estate instrument, the grantee is the person to whom property is conveyed.
The grantor, in a legal instrument (such as a deed or assignment), is the person conveying the property to another person or entity.
Gross Mineral Acres
Gross mineral acres represent the total acreage in a given tract of land. If you own all of the minerals under a specific tract of land your Gross Mineral Acres and Net Mineral Acres (NMA) will be equal. If you own a fractional interest, then the number of net mineral acres you own will be less than the gross acres.
Held By Production
A mineral lease provision that extends the right to operate a lease as long as the property (oil or gas well) is producing in paying quantities. A lease can be “held by production”, giving the operator the option to drill future wells under the current lease terms.
A landowner is a person who owns the surface of a tract of land but may or may not own the minerals under the land. Also referred to as a “Surface Owner”. Many times the minerals have been conveyed in a previous sale of the property and the surface owner does not own the mineral rights.
An oil and gas lease is a legal agreement outlining the basic terms and conditions for developing lands or minerals including the royalty to be paid, the length of the lease term, and the description of the leased property. Most modern leases have additional clauses.
A lease bonus is a per-acre cash payment paid after the execution of an oil and gas lease. The lease bonus is in addition to the royalty or rental payments specified in the terms of the lease. Sometimes leases bonus rates are used to value non-producing minerals.
Primary Lease Term
The primary lease term is the initial period in an Oil and Gas Lease giving the operator time to permit, complete, and drill a well. The initial period is generally three to five years and often includes an option to extend the primary lease term for additional consideration.
A legal description is the geographical description of the boundaries of a property for the purpose of identifying the property for legal transactions. In Texas, the legal descriptions will contain some or all of the following: County, abstract, survey name, block, and section number. In many states, legal descriptions contain County, section, township, and range.
Mineral acres refer to the full mineral interest as expressed in units of one acre of land. See also, Gross Mineral Acres, Net Mineral Acres and Net Royalty Acres.
A mineral deed is a legal document showing ownership of oil and gas mineral rights under a specific tract of land. Mineral deeds do not contain the title to the surface land or property attached to the surface. There are several types of mineral deeds.
The ownership of all rights to develop gas, oil, and other minerals below the surface of a tract of land. Mineral interest may be acquired by inheritance or purchase.
A mineral owner is an individual, group of individuals or entity who owns the minerals under a tract of land but may or may not own the surface above it. Mineral owners have the right to explore, develop and produce the minerals they own.
A mineral is an element or chemical compound that has been formed as a result of geological processes. In this context, minerals refer to oil, gas and other products that are produced from a conventional or unconventional well.
Monthly Cash Flow
The monthly cash flow for a producing oil or gas well is the sum of all net revenue received on a monthly basis. A simple rule of thumb for mineral valuation is 3 years net revenue, which is based on an average of the previous 6 months cash flow.
Neighboring Offset Production
Offset production is any known producing oil or gas wells in the immediate area surrounding the property.
Net Mineral Acres
Net mineral acres represent the net acreage owned by a mineral owner, of the total gross acres in a specific tract of land. For example, if you own one-half of the minerals under a 50-acre tract of land, you own 25 net mineral acres out of 50 gross mineral acres.
Non-Participating Royalty Interest (NPRI)
Non-participating royalty interest (NPRI) is a share of the production that is carved out of the mineral interest. Non-participating royalties are sometimes retained by mineral owners, who wish to sell their interest but retain a small portion of any royalty payments. The NPRI does not get to execute leases or participate in decisions related to exploration or production.
An offset operator is any known operator of an oil or gas well in the immediate area surrounding the property.
An offset drilling permit is any request by an operator to drill a new oil or gas well in the immediate area surrounding the property.
An operator is an individual or entity responsible for the exploration, development, and production of an oil or gas well or lease. Operators hold the working interest in an oil or gas well and are responsible for distributing royalty payments to the royalty interest owners.
Paid Up Lease
A paid-up lease is an oil or gas lease for which all the delay rentals are paid in advance (along with any cash bonus). No further action is required during the primary term of a paid-up lease until a successful well has been completed and is producing oil and/or gas.
Pooling, or unitization, is the combining of small tracts of land into a unit large enough to meet the state’s space regulations for drilling permits. By pooling property, operators can maximize production from the reservoir. See also: forced pooling.
Overriding Royalty Interest
An overriding royalty interest (ORRI) is the right to a share of well production free from the costs related to production. It is carved out of the working interest under an oil and gas lease. ORRIs are sometimes conveyed to geologists and other land management professionals as compensation for their services.
A producing well is a well that is actively producing paying quantities of oil and gas. See page on producing vs non-producing mineral rights.
Each well is classified as either an oil or gas well, even if both oil and gas are produced from the same well. Royalty statements will include a separate line-item for oil, gas and other production products, indicating the month of production along with the volume and until price.
The Pugh Clause is a clause in an oil and gas lease that releases non-producing acreage at the end of the primary term.
The purchaser is the company authorized by the operator, under a purchase contract, to transport and market the oil or gas from a producing well. Mineral owners may be paid by the well operator or by the purchaser.
Purchase and Sale Agreement
A purchase and sale agreement is a legal document used during a basic sell of oil and gas producing properties for working, royalty, or mineral interest. Minerals can also be sold using a conveyance document in which one owner conveys the minerals to another.
Quick Claim Deed
Recorder of Deeds
The Recorder of Deeds is a designation of public officers who record documents that establish ownership of property, mortgages, and other instruments that relate to real property in official record books provided and maintained for such purpose.
Reserves are the estimate of the amount of crude oil and natural gas located in a particular economic region, basin or field and that have the potential of being extracted under current technological constraints.
A revenue check is a monthly check a royalty or mineral owner receives from the net production of an oil or gas well. The royalty statements that accompany a check contain a basic accounting of the property well including what the entire well produced and earned as well as the individual owner’s share of the production and net revenue.
Shut-in Royalty Clause
Surface Use Agreement
Where We Buy Mineral Rights
We buy both producing and non-producing minerals in all oil and gas states. However, we are especially interested in Texas and Kansas mineral rights.
We even buy minerals in more obscure states, such as Michigan and Illinois, which produce a very little oil and gas compared to other states.
How We Value Mineral Rights
There are many factors that play into the value of mineral rights. These include location, producing vs. non-producing properties, current oil and gas prices, well production figures, lease terms, and even the operator of the well or wells. We also look at the risks of buying and owning minerals that you are interested in selling.
Minerals in the hottest shale plays are more valuable than those in older fields with conventional wells.
Producing vs. Non-Producing
Producing minerals are often worth more than non-producing minerals because they are generating revenue.
Oil & Gas Prices
When oil and gas prices drop, revenue drops, and sometimes operators are unable to continue operating the well.
Highly productive wells (and off-set wells) can increase the value of your minerals.
Favorable lease terms (such as a 25% royalty reservation) positively impact the value of the leased minerals.
A small number of operators are unethical, and their reputation automatically devalues your minerals.
Why People Sell Their Mineral Rights
I am putting my affairs in order. I don’t want to burden my kids with the hassle of transferring ownership and managing small mineral rights. When my sister passed away, my niece and nephew had to hire an attorney to help them with the minerals. I don’t want my kids to go through that.
I inherited my mineral rights so they were sentimental, but I don’t really want to bother with managing them and filing extra tax returns. I decided to sell and use the money as a down payment on my house.
I had no idea how fast the oil production would decline. My checks are only 20% of what they were a few years ago. I should have sold my mineral rights when the wells were brand new and still generating huge royalties.
My oil wells have been producing for decades and the reserves are almost depleted. Once the wells are plugged, the value will be significantly lower. I’d rather cash out now.
I inherited mineral rights, but don’t want to be involved with fracking and fossil fuels. I would prefer to support renewable energy and do my part to reverse climate change.