Pheasant Energy clients frequently ask us if they should request a higher payment for an oil or gas lease bonus or a higher royalty when negotiating an existing oil and/or gas lease. It’s a great question. All mineral rights owners are not in the same financial position. This is a discussion about royalty, but let’s first talk about the differences between an oil-and-gas lease bonus payment and an oil-and gas royalty payment.
Lease bonuses are a one-time payment that the mineral rights owner receives upon signing the lease. The mineral rights owner receives a monthly royalty from a portion of the production proceeds. The royalty is often described as a fraction, such as 1/8th or 1/6th in the lease.
You may need to choose between a higher lease bonus and a higher royalty when you negotiate an oil and natural gas lease with an operator. How do you make a decision? What are the most important factors to consider? You will be offered by the company. They will usually offer to increase your lease bonus ….or the lease royalty if you decline. But not both. You can find these lease terms as well as others here. Let’s not forget to answer some questions that are always asked.
When you sign the lease, you will receive a bonus. This is a 100% guarantee. You will only receive an oil and gas royalty payment if the well is drilled by the oil company. The success rate of wells that are drilled in new areas is only 20%. Monthly royalty checks can make you a lot of money. There is no guarantee that you will receive an oil or gas royalty payment.
In a future post, we will discuss the oil and gas mineral lease bonus. Negotiating the royalty interest in an Oil and Gas Lease is crucial for both the mineral rights owner as well as the oil company.
The Economics of Drilling A Well
The cost of drilling and completion of a well can easily reach $10,000,000 for oil companies. Economic factors are one of many things that must be considered when drilling is decided. How long does it take for an operator to pay back the drilling and completion costs, sometimes called “payout”. What amount of money will the operator earn from the sale and distribution of production during the life of the well. The lease’s royalty rate has a significant impact on economics. The operator will get less if the royalty rate in the lease is higher.
A lease that has a 1/8th (12.5%), royalty will result in the operator paying 100% for all costs and receiving 87.5% revenue. The 12.5% remaining would be the royalty interest paid to mineral rights owners on oil and gas. The operator would have to pay 100% of all costs if the royalty rate was 20%. However, he or she would only get 80% of the revenue. The longer it takes for the wells to pay out, the higher the royalty rate.
Royalty on Oil and Royalty on Gas
What is the difference between oil royalty or gas royalty? Generally, not. Most leases have the same royalty rate for oil or gas produced and sold. The price paid for oil and gas is what is different. Operators could receive $38/barrel oil or $2.50/mcf gas.
Other Mineral Royalty Issues
Keep an eye out for blog posts about other important oil-and-gas royalty issues such as:
Read your monthly royalty statements
Revision of your Division Order
Are transportation and other fees deducted by the operator before you receive your royalty payment?
Why would oil and gas royalty buyers offer to buy your oil or gas minerals?
You can sell your royalties on oil and gas. Pheasant Energy will ensure you get the best possible price.
Pheasant Energy wants mineral rights owners to know. We can help you if someone contacts you to lease or purchase your mineral rights. Pheasant Energy wants you to know the true value of your mineral rights regardless of whether you receive a monthly oil or gas royalty check.