In America, we enjoy a broad range of property rights. One such right is mineral ownership under the land we own, assuming someone before us has not severed the mineral estate from the surface estate. A legally binding mineral title opinion is typically the only document that substantiates mineral ownership.
Learn oil and Gas Basics
Often landowners are relatively uninterested in minerals, mineral estates, etc. until they receive a letter from an oil company proposing to lease their mineral rights. Then, everything changes. An oil company is interested in leasing your minerals because they have reason to believe that they can find oil or gas there.
The Oil Company (a.k.a. the Operator) Relationship with the Mineral Owner
To bring oil and gas reserves to market, minerals are leased by oil companies through a legally binding contract known as an Oil, Gas, and Mineral Lease. This arrangement between individual mineral owners and oil companies began prior to 1900 and still thrives today. Although there are numerous other important details, the basic economic structure of the Lease is straightforward: in exchange for an up-front lease bonus payment, plus a royalty percentage of the value of any production, the mineral owner grants the oil company the right to drill and produce.
Drilling and Completion Activities
Assuming the oil company decides to drill, they may drill on your tract. If you are a surface owner, the oil company will likely propose a drill site, notify you, and offer to pay for damages related to the surface use. Obviously, all parties should be guided by reasoned thinking as to the compensation for damages, road usage, pipelines etc. Both parties should remember that realizing economic gain from mineral production is accomplished by partnership between the mineral owner and the Operator.
Oil and Gas Marketing
In the majority of cases, a royalty owner’s share of production is marketed and sold along with the working interest owner’s portion (working interest owners are those owners obligated to pay for the expenses of drilling and operating a well).
Oil and Gas Measurement
Produced oil and gas is measured prior to leaving the well site, as required by law. The gross volume from which your royalty share is calculated is based on this measurement. Customary industry standard requires that the Operator verifies the measurements through a check meter for gas, or by checking the levels in the oil storage tanks.
Oil and Gas Royalty Statement Deductions
You may notice a column on your royalty check stub that contains deductions for making production ready for sale. Common deductions are for compression and dehydration, and removing impurities from gas. Debate, often in court, has gone on for years as to the applicability of these charges.
Oil and Gas Prices
Important to any article on oil and gas basics is certainly a paragraph on pricing. Crude oil and natural gas are commodities, and subject to daily swings in their value in the marketplace. The actual cash price which royalty owners and oil companies receive is usually based upon a contracted price set each month. Keep in mind that the oil company (along with you the royalty owner) benefits by negotiating for the best price possible.
Oil and Gas Severance Taxes and Ad Valorem Taxes
The governments levy a severance tax when natural resources such as oil and gas are “severed” from the earth. Generally, the Purchaser is responsible for collecting and accounting for this tax which is collected during the normal monthly accounting cycle. This should be easily calculable, and match the deduction shown on your royalty check stub.