Oil and gas royalties are not as complex as most people think.
They are actually fairly simple, and I’ll explain clearly what they are and how they generate cash.
Mineral Rights may not reside with the Surface Rights
If you own a farm, then you own the land also known as the surface rights. Often, when you bought the farm, your deed conveyed the mineral rights under the farm along with the surface rights. Owning the mineral rights means you legally have the right to explore, extract, and sell any oil, gas, coal, uranium, helium or other mineral that rests beneath your land.
Most landowners, however, don’t have the geological knowledge or training to understand the potential minerals under their land. In fact, many landowners forget they own the mineral rights under their land. Further, the average landowner does not have the multi-million dollar budgets to explore for oil, or the social networking skills to raise a multi-million dollar exploration fund.
Oil companies do have the knowledge and funding to explore for oil and gas. So when they identify a region that likely contains oil and gas, they negotiate with the landowners to lease their mineral rights for oil and gas exploration. This lease gives the oil companies permission to explore for oil and gas and to produce and sell it if they find petroleum in economic quantities.
Dual compensation for Mineral Right Owners
The landowner receives two forms of compensation for leasing his minerals. The first is called a ‘Bonus’ which is a signing bonus that is paid on a per acre basis. Typically $200-$500 per acre. The bonus will be paid once at the time of the signing of the lease, and it may be the only money the landowner will get.
The second is the oil and gas royalty which is the percent of the money generated by the oil and gas from his property. Traditionally 12.5%, but more recently around 18% – 25%. The percentage varies upon how well the landowner negotiated and how expensive the oil company expects the extraction of oil and gas to be.
However, if the oil company finds no oil or gas, or not any in economic quantities, then they abandon the prospect, and the lease expires which reverts the mineral rights back to the landowner. In this case, the Bonus was the only money the landowner received.
In the event oil and gas were found and the wells produce, then the royalties kick in. So if the oil well produce 100 barrels a day, and the price of oil is $80 per barrel that month, then the cash flow is 100x$80 = $8,000/day The royalty owner, who agreed to 15% royalty, would receive $8,000 x 0.15 = $1,200/day. Over a month, that brings in $36,000 per month to the mineral owner, who in this case, is the landowner. Now you see why oil is a big business!
Oil and gas royalties paid to the landowners will often last for decades. The oil and gas wells will deplete, however, so over time the money received from oil and gas royalties will drop considerably. The average well is thought to last 35 years.
Because of the reliable cash flow stream, oil and gas royalties make for a good investment. Finding oil and gas royalty owners who want to sell their royalties is the tough part. That’s why Blackbeard Data is here for you.