Producing vs. Non-producing
Mineral Rights
All mineral rights fall under two categories: producing and non-producing
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What is the Difference Between Producing and Non-Producing Minerals?
Non-producing minerals are undeveloped oil, gas, and other minerals in the ground. There are no oil or gas wells extracting the minerals, and therefore, no royalty payments. The owner of the mineral interest has the right to explore, develop, and produce the minerals.
Producing minerals have one or more active oil and gas wells. Royalty owners are paid royalties on the proceeds from the sale oil, gas, and other minerals that are produced under a specific tract of land.
Examples of Producing and Non-Producing Mineral Rights
Producing Minerals Example 1
These Loving County minerals, located in the Permian Basin, are just about as good as it gets. There is a mix of successful horizontal wells and newly permitted wells. The surrounding sections also contain a mix of new and permitted unconventional wells. These minerals are among the most valuable in the country.
Producing Minerals Example 2
This is a great example of producing minerals in Glasscock County with good upside potential. The nearby horizontal wells are a good indicator of future horizontal drilling potential. These minerals will be quite valuable - unless the off-set production is poor. It is really important to look at the offset production when evaluating these minerals.
Producing Minerals Example 3
These producing minerals are located in an older oilfield in the Texas Panhandle. Many of the wells have been plugged, and those that are still producing may be near the end of their economic life. The permits are from the 1980s and indicate planned wells that were never drilled. These non-producing minerals hold very little value.
Non-Producing Minerals Example 1
These Reeves County minerals, also located in the Permian Basin, are interesting. There are several horizontal wells in the surrounding sections and many new permits. Clearly, the E&P companies are excited about this area. But why are there wells or permits in this tract? Is there a structural issue, or perhaps the majority mineral owner refuses to sign an oil and gas lease?
Non-Producing Minerals Example 2
This tract of land in Gray County, TX, has no oil and gas development. Furthermore, it is quite a ways from the nearest development. As you can see, there are several dry holes in the offset sections, indicating previously unsuccessful wildcatting activity. These mineral rights do not hold a lot of value and may be difficult to sell.
Non-Producing Minerals Example 3
These Gray County, TX minerals highlight a common situation where mineral owners find their interest just outside the borders of an oil field. This is an older oil field, and the dry holes indicate the boundary has been well established. There is unlikely to be future drilling on this tract, and therefore, the minerals are not all that valuable.
Oil and Gas Lifecycle
How Non-Producing Minerals become Producing Minerals
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1
Locate
Locate Potential Oil and Gas
A geologist identifies and area that may contain economic quantities of oil or gas. Working with the surface owner (who may or may not own the mineral rights), arrangements are made for seismic and other tests that will identify the sub-surface geological structures.
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2
Explore
Drilling Decision
After geologists, geophysicists, petroleum engineers, and reservoir engineers have reviewed the data, the exploration and production (E&P) will decide whether or not to drill a well.
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3
Lease
Locate Mineral Owners
Once the company has decided to drill a well, they hire a landman (or a team of landmen) to locate the unleashed mineral owners. Landmen review the county's deed records to determine who owns the mineral rights and how much they own. If sufficient mineral owners can be located, the landman will attempt to contact each and negotiate an oil and gas lease.
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4
Title Opinion
Order Well Site Title Opinion
Before a well is drilled, the company will order a Drillsite Title Opinion from an attorney. The title opinion lists list the ownership interest for each of the Royalty Interest (RI), Non-Participating Royalty Interest (NPRI), Overriding Royalty Interest (ORRI), and Working Interest (WI), and surface owners.
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5
Drill a Well
Drill the Well
After leasing the mineral rights and securing the Division Order Title Opinion, it's time to drill the well. The drill site becomes the well site. Drilling can take days or months, depending on a variety of factors. Once a well is producing oil and gas, the status of the minerals becomes "producing".
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6
Sell the Oil and Gas
Selling the Oil and Gas
E&P companies negotiate contracts to sell or "market" the oil, gas, and other products. The price may include the cost of transportation or "marketing".
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7
Pay Interest Owners
Pay Interest Owners
A Division Order Title Opinion (DOTO) tells the operator who should be paid and how much interest each owner has. Each interest owner will be sent a Division Order (and a W9). Interest owners who have title issues will have to fix those issues before being paid.
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8
Productive Life
Productive Life of the Well
If the well is successful, it will produce for as long as commercial quantities of oil and gas can be recovered. During this time, all owners holding an interest in the well will be paid, as long as their title is clear. Owners with cloudy title are put into suspense. As time goes on, minerals are bought, sold, and inherited. Each operator has a royalty relations department that processes changes in ownership.
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9
End of Life
Plugging a Well
When an oil or gas well is no longer producing economic quantities (usually due to low commodity prices or because of low production), the well is plugged and the oil and gas lease is released and royalty payment end. The minerals are non-producing once again.
Why Sell?
Why People Sell Their Minerals Rights:
With the price of oil declining and operators practically giving gas away, I decided to sell before the bottom falls out.
I am on a fixed income, and the sale of these minerals will help me secure stable housing. My children will be okay if even if they don't inherit these minerals.
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.