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.
16 Comments
My father recently passed away and left me with 8 acres. I was going over deed and found out, I think, I own mineral rights and oil and gas rights. How can i find out for sure and what that means for me?
In your case, an attorney is probably your best bet. We may be able to search for your fathers holdings in Texas if there is current royalty payments.
Find a landman local to your area. They are cheaper than an attorney.
I recently inherited several tiny percentages in various oil fields. When I received the 1099 forms for taxes, most of the revenue was filed as Royalties but two sources were classified as “Working Interest” and filed instead under “Non-Employee Compensation” which is taxed at a higher rate than Royalties.
I read your answer on “What is an Oil and Gas Working Interest” (thank you!) but still don’t quite understand the nature of the revenue. Is “Non-Employee Compensation” really the best way to report it or can I ask them to reclassify?
I am a 1031 like-Kind facilitator and have acquired Oil and Gas Royalty contracts as replacement property for my exchangers in the past.
Recently my brother has been asking me questions because he received a prospectus from a company. I full realize that a prospectus only tells the good parts and it is up the the investor to educate themselves with research and guidance.
I am sure there must me independent brokers who have worked in this area and KNOW how to guide a first time investor into a long term investment. Some one who knows the reputation of the geology companies providing the reserves, which operators are good, which companies structure reasonable fees
My personal experience with prospectus preparation is that they can screw the investor just as long as they disclose it.
Who would you recommend I refer my brother to for this type of guidance.
My grandmother purchased mineral rights of some property in oklahoma and my aunt said said that she along with my mother inherited those rights my mother is now passed and so my aunt said that me and my siblings now own these rights she was recently contacted by a company that said they are going to start drilling for oil on that land where we own the mineral rights. Does this mean we may receive money if they drill a well that starts producing oil
It would all depend on your grandmothers’s Will and provisions, as well as, your mother’s Will and provisions. It also depends on whether or not they died testate or intestate (with or with out a Will). In addition, it would depend on where they died and the laws of succession in that state (if they died intestate). There are many other variables that could affect whether or not you are entitled to any interest held by your grandmother, then mother at the time of their deaths. I’m sorry, but this is simply not a yes or no question. I would suggest meeting with an attorney who deals with probate. Or perhaps, a cheaper route would be a landman. Most landmen are knowledgeable about probate and laws of succession and can be a cheaper route Vs. an attorney. And if you would like to know exactly how much interest may have been acquired by a family member in their lifetime, I would suggest hiring a landman, local to your area.
My Grandfather left natural gas and oil royalties for my mother and her siblings. My mother recieved an offer to buy these royalties. I was speaking with one of her siblings and she told me “How come you don’t buy them?”. I got interested and asked my mother about it. She is willing to sell it to me at the price that was offered to her. Is it wise to buy these? And is it hard to go about doing the changes?
It could be worth it. I would buy it and keep it, and pass it down to my children. You never know when residual income is lurking around the corner. Buy it, and keep it in your family. That’s all I can say.
My dad sister is getting royalty off oil wells he supposed get some to but his sister want tell him about this so she’s getting all the money for years . How does he find out we’re the oil royalty are coming from please contact me if you can help901-619-9095thanks
My mothers owns gas and royalty interests in East Texas. She has been receiving offers to purchase her rights from National Royalty Company, Ltd in Dallas Texas. Is this a reputable company? They are not listed in the Better Business Bureau, and I really don’t trust mail or phone solicitation. Thanks for the help!
I have been told my grandfather owned several oil wells that are being mined by several companies. I found one well and one of these companies. How do I go about finding the others? How would I know how if there are others?
i recently received a letter in the mail stating that i owned 44 acres in west virginia through an inheritance from a great grandparent, but to find out and oil and gas company is trying to drill.. i dug deeper and talked to the leaser of the land that they told us we had “mineral rights” to and he informed me we dont own the land just whats underneath it. My question is he telling us its going to be a small amount every month close to 100 dollarsUS; with this being stated this doesnt seem at all right considering we are dealing with oil and gas am i wrong?!?!?
my wife and I are a 3rd generation under 4 ranches in permian basin (wolfberry,cline play) apache is always 6 or 7 months to pay us after they hit oil.
ya what would 26 acres in wet gas pay ? I heard 2600 to 7000. an acre. to people making 36,000 a month . an a guy hit oil up the road so theres a chance to hit oil or wet gas is oil? anyone know? e-mail me thanks..
I feel like an idiot because I didn’t take the time to understand how mineral rights work.
I have a small piece of property that I sold my mineral rights on. Or I thought I did. This was about 2 years ago. Now I’m being approached to sale them again. How is this possible? Is there something in the fine print that I over looked? Did I just sale them for a period of time?