Oil and Gas Royalties Commonly Used Terms
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A
Ad Valorem Taxes
A tax based on the assessed value of real estate or personal property. Ad valorem taxes can be property tax or even duty on imported items. Property ad valorem taxes are the major source of revenue for state and municipal governments. Click here to learn more about Ad Valorem Taxes.
Assignment
The sale, transfer or conveyance of all or a fraction of ownership interest or rights owned in real estate or other such property. The term is commonly used in the oil and gas business to convey working interest, leases, royalty, overriding royalty interests and net profit interests. Click here to learn more about assignment of oil and gas leases.
B
Basin
A large bowl shaped depression in the subsurface under the land that has the potential to contain Oil & Gas. Learn more about oil and gas basins.
BBL
A barrel of liquid, usually oil or water. Equivalent to 42 U.S. gallons.
BCF
A billion cubic feet of natural gas.
BOE
Barrels of oil equivalent. Used to describe hydrocarbons in terms of a barrel of oil. See Bcfe for conversion factors.
Bonus
A monetary incentive given by the company to the mineral owner for executing or ratifying an oil, gas and or mineral lease. Learn more about lease bonuses.
C
CFEB
A billion cubic feet equivalent. Used to describe hydrocarbons in terms of cubic feet. Determined using the ratio of 6 Mcf of natural gas to 1 Bbl of crude oil. This ratio is derived from the energy output (Btu’s) obtained from each source, however it is usually not accurate on an economic basis and therefore alternative ratios can be used. For example $6/Mcf of gas to $60/bbl of oil.
Clear Title
A clear title is a chain of title without any kind of lien or levy from creditors or other third parties and poses no question as to legal ownership. In other words, you are the rightful owner and there are not any legal judgments tied to the minerals. Learn more about clear titles.
Commodity Prices
The price a mineral owner receives is commonly referred to as the wellhead price, which is net of transportation and other purchaser fees. Wellhead prices are generally calculated using an oil and gas posted pricing index as determined. Learn more about commodity prices.
Completion
The process of preparing a well for testing and production. This often includes running and cementing production casing, perforating and stimulating.
Condensate
A low-density mixture of hydrocarbon liquids that are present as gaseous components of natural gas produced from many natural gas reservoirs. It condenses out of the gas if the temperature is reduced to below the dew point temperature.
Conveyance
A written contract between a grantor and grantee, used to transfer title or rights to real estate or property. Typical conveyances include oil, gas and mineral leases; assignments; deeds and rights of way.
D
Delay Dental
Consideration paid to the lessor by a lessee to extend the terms of an oil and gas lease in the absence of operations or production that is contractually required to hold the lease. This consideration is usually required to be paid on or before the anniversary date of the oil and gas lease during its primary term, and typically extends the lease for an additional year. Nonpayment of the delay rental in the absence of production or commencement of operations will generally result in abandonment of the lease after its primary term has expired.
Depth Rights
Depth Rights refer to the rights a mineral owner owns below the surface. If a mineral owner does not own all rights at all depths, or does not intend to sell all rights, seller needs to disclose what rights and depths are for sale. For example, a mineral owner may have sold all mineral rights from 10,000 feet to the surface. In this case the mineral owner still owns the mineral rights at depths greater than 10,000 feet. Click here to learn more about Depth Rights.
Development Well
A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.
Distillate
Liquid condensed from a gas during distillation.
Division Orders
A contract with a crude oil or natural gas purchaser directing the payments of oil and gas revenues to the working, royalty and mineral interest owners of a well.
E
Enhanced Oil Recovery (EOR)
Techniques used to increase the amount of oil that can be extracted from an oil reservoir.
Exploratory Well
A well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir, or to extend a known reservoir.
G
General Maps
Maps may include aerial photos of the acreage, interpreted seismic maps, oil and gas field or basin maps, well logs and other various visuals that aide the representation of an area of land.
Gross Mineral Acres
Gross mineral acres represent the total acreage in a given tract of land. If you own all of the minerals under a 100-acre tract of land your Gross Mineral Acres will be equal to your Net Acres. Gross Production Tax: A state tax imposed primarily on mining companies for each unit mined.
H
Help by Production
A mineral lease provision that extends the right to operate a lease as long as the property is producing in paying quantities of oil & gas.
Horizontal Drilling
A drilling technique used by an operator in order to produce a larger portion of the target formation than conventional (vertical) drilling. This process can result in both increased production rates and greater ultimate recoveries of hydrocarbons; the cost of the well however tends to be more expensive. Click here to learn more about Horizontal Drilling.
Hydrocarbon
An organic compound that contains only carbon and hydrogen. These compounds can exist in a gaseous, liquid, or solid state depending on the pressure and temperature they are exposed to. Methane, propane, and octane are examples of these.
L
Land Broker
An individual or company that acts as an agent for others, as in negotiating contracts, purchases, or sales in return for a fee or commission.
Landman
Landman is a person who negotiates with mineral owners regarding the leasing of their mineral rights on behalf of an oil company or as an independent contractor.
Landowner
A person who owns the surface of a tract of land but may not own the minerals under the land. Also referred to as a “Surface Owner”
Lease Agreement
The agreement outlining the basic terms and conditions for developing lands or minerals such as the royalty to be paid, the length of the term, and the description of the leased lands.
Lease Bonus
Cash consideration paid to a landowner or mineral owner following the execution of an Oil, Gas and Mineral Lease in addition to any rental or royalty obligations specified in the lease.
Lease
A contract between mineral owner, otherwise known as the lessor and a company or working interest owner, otherwise known as the lessee in which the lessor grants the lessee the right to explore, drill and produce oil, gas and other minerals for a specified primary term and as long thereafter as oil, gas or other minerals are being produced in paying quantities. This lease gives the lessee a working interest. The oil and gas lease is granted in exchange for royalty payments to the lessor.
Legal Location
Legal description is the geographical description of a property for the purpose of identifying the property for legal transactions. For example, In Texas you will need to anticipate needing some or all of the following: County, Abstract Number, Survey Name, Block Section/Survey No., or Alternate Name. In Oklahoma, and most other states you will need to anticipate needing the following: County, Section, Township and Range. Latitude and Longitude or tax parcel id’s are also helpful.
M
MBBLS
One thousand barrels.
MBO
One thousand barrels of oil.
MBW
One thousand barrels of water.
MCF
A thousand cubic feet.
MCFE
A thousand cubic feet equivalent.
Mineral Acres
The full mineral interest as expressed in units of one acre of land.
Mineral Deed
A signed, written legal document that shows the ownership of oil and gas mineral rights.
Mineral Interest
The ownership of all rights to gas, oil, and other minerals at or below the surface of a tract of land.
Mineral Owner
A person who owns the minerals under a tract of land but may not own the surface above it.
Minerals
A mineral is an element or chemical compound that has been formed as a result of geological processes. Minerals as we refer to them on our website are crude oil and natural gas products.
MMBBLS
One million barrels.
MMBO
One million barrels of oil.
MMBBLS
One million barrels of oil equivalent
MMCF
One million cubic feet.
MMCFE
One Million cubic feet equivalent.
Monthly Cash Flow
Monthly cash flow is the sum of all net revenue received on a monthly basis from the net minerals owned for the property to be listed, sold or leased. For all royalty listings, seller needs to initially show evidence of the most recent 6 months of net cashflow.
N
Neighboring Offset Production
Neighboring offset production is any known producing oil or gas well in the immediate area surrounding the property (which is to be listed, sold or leased).
Net Mineral Acres
Net mineral acres represent the net acreage owned by mineral owner, of the total gross acres in a given tract of land. For example, if you own one half of the minerals under a 100-acre tract of land, you are said to own 50 net mineral acres out of 100 gross mineral acres.
Net Mineral Acres
Net mineral acres represent the net acreage owned by mineral owner, of the total gross acres in a given tract of land. For example, if you own one half of the minerals under a 100-acre tract of land, you are said to own 50 net mineral acres out of 100 gross mineral acres.
O
Offset Drilling Permits
An offset drilling permit is any request by an operator to drill a new oil or gas well in the immediate area surrounding the property (which is to be listed, sold or leased).
Offset Operator
An offset operator is any known operator of an oil or gas well in the immediate area surrounding the property (which is to be listed, sold or leased).
Operator
The person or company designated in the Operating Agreement to conduct and manage the operations of an oil or gas well.
P
Paid Up Leases
An oil and gas lease in which delay rentals for the entire primary term are paid in advance with the bonus consideration.
Perforations
Holes shot in an interval of casing in order to allow formation fluids to flow into the wellbore.
Plat Maps
Plat map is a document drawn to scale, showing the divisions of tracts of land.
Pooling
The consolidation and combining of leased land with adjoining leased tracts. The area is called a pool or a unit.
Primary Lease Term
The initial period in an Oil and Gas Lease to develop the property for the production of oil and gas. Often the initial period includes an optional extension period for additional bonus consideration.
Primary Term
The period of time during which an oil and gas lease will be in effect, in the absence of production, drilling or other operations specified by the lease. The oil and gas lease can be perpetuated past the primary term by production in paying quantities, drilling, operations and/or the payment of shut-in royalties specified by the lease.
Producing Well
A producing oil and gas well is a well that is actively being produced as a flowing or pumped well to extract oil and gas from below the surface, which is then sold to an oil and gas purchaser.
Production Decline Rates
The production decline rate is a measure of how rapidly the production is declining from a well, field or group of fields. It is not to be confused with depletion rate, which is how rapidly the remaining recoverable reserves in a field or region are being produced.
Production Type
Each well is classified as either an oil or gas well. In most cases, the division order stub will indicate the type of interest. Additionally a royalty check will indicate the type of production sold.
Pugh Clause
A clause, which is calculated to prevent the holding of non-pooled acreage in a lease while certain portions of the lease acreage are being held under pooled arrangements. The main purpose of a Pugh clause is to protect the landowner from having their entire property held under a lease by production from a very small portion.
Purchase and Sale Agreement
This a form of Purchase and Sale Agreement used in a basic sale of Oil & Gas producing properties, for working, royalty or mineral interest.
Purchaser
The purchaser is the company authorized by the operator, under a purchase contract, to transport and market the oil or gas from a producing well. In most cases the purchaser pays the mineral owners for the sale of any oil or gas from a well.
Q
Qualified Buyer
A Qualified Buyer represents personal income of not less than an annual income of $200,000.00 for any natural person in each of the two most recent years or joint income with the person’s spouse of less than $300,000.00 in each of those years and has a reasonable expectation of reaching the same income level in the current year. OR any natural person whose individual net worth or joint net worth with that person’s spouse, at the time of his purchase exceeds $1,000,000.00. OR Any Business entity, not formed for the specific purpose of acquiring the Property or Properties, with total assets in excess of $5,000,000.00, and that amount must be shown on its most recently prepared financial statements.
R
Recompletion
The completion for production of an existing well in another formation from that in which the well has been previously completed.
Recorder of Deeds
The Recorder of Deeds is a designation of public officers who record documents that establish ownership of property, mortgages, and other instruments that relate to real property in official record books provided and maintained for such purpose.
Reserves
Reserves are the estimate of the amount of crude oil and natural gas located in a particular economic region, basin or field and that must have the potential of being extracted under current technological constraints.
Revenue Check
A Revenue Check is the check a royalty or mineral owner receives from the net production of an oil or gas well. The Revenue Check will have a Gross Dollar Amount, as well as a Net Dollar Amount, less Taxes (NET).
Royalties
Royalties refer to the ownership of a portion of the resource or revenue that is produced from an oil or gas well.
Royalty Interest
Mineral or Royalty owner’s share of production, net of production and transportation expenses, when and if oil and/or gas is produced on the property. Most often expressed in 1/8 units (or some fraction) of the production but can also be expressed as percentage of production.
Royalty
A percentage share of production, or the value derived from production, paid from a producing well. It is important to specify how royalties are to be calculated and paid as well as insuring that you are given the right to have a third party auditor verify the records of the production from your wells. Your royalty should be free of the costs of drilling and producing.
S
Secondary Term
The term of an oil and gas lease in which the lease is held in force after expiration of the primary term. Production, operations, continuous drilling and/or shut-in royalty payments are often used to extend an oil and gas lease into its secondary term.
Severance Tax
A tax imposed on the removal of nonrenewable resources such as crude oil, condensate and natural gas, coal bed methane and carbon dioxide. Severance tax is charged to producers, or anyone with a working or royalty interest, in oil or gas operations in the imposing states. You may be charged severance tax even if you do not realize a net profit on your investment.
Severance
Mineral rights may be severed or separated from surface rights by mineral deed or by mineral reservation. Severance by mineral deed occurs when a party owning both surface rights and mineral rights sells or grants by deed all or a portion of the mineral rights underlying his/ her property. This deed, known as a mineral deed, is registered with the county register of deeds and will become a part of the abstract of title to the land involved.
[Learn More About Severance]
Shut In Royalty
A payment stipulated in the oil and gas lease, which royalty owners receive in lieu of actual production, when a gas well is shut-in due to lack of a suitable market, a lack of facilities to produce the product, or other cases defined within the shut-in provisions contained in the oil and gas lease. It is the responsibility of the landowner to clearly establish the allowable time limits for a well to be shut in by way of an addendum.
State Permits
State Permits may be an application to drill, recomplete, re-enter or complete a well, filed by the operator. It could also include any other legal document filed with a state agency that lends itself to explain matters related to an oil and gas property for sale.
Stimulation
A process used by the operator in order to increase the conductivity between the formation and the wellbore. Acidizing and frac’ing are both forms of stimutation.
Surface Rights
Surface rights are rights owned by a land owner in a parcel of real estate that are limited only to the surface of the property and do not include ownership of the minerals below the surface. Mineral rights can be severed from surface property ownership.
Surface Use Agreement
A Surface Use Agreement is a legal document that defines notice, location and operational requirements regarding the potential impacts of oil and gas operations or mineral development on a surface owners property.
T
Term Lease
An oil and gas lease that expires after a specified period of time, regardless of whether oil, gas and/or other minerals are being produced. Third party purchasers less the expense to get it from the well to its sales market.
Top Lease
An oil and gas lease wherein the bonus consideration is paid at the signing of the lease. However, this lease becomes effective only after the expiration or termination of an existing lease on the tract of land.
U
Unit
Pooling is the consolidation and combining of leased land with adjoining leased tracts. The unitized area is called a pool or a unit. Pooling has the benefit to the operator of unitizing multi-landowners’ leases into a common pool, as per state approved regulations, combining one common underground geological reservoir’s limited drainage capability.
Unitization
The combining of multiple wells to produce from a specified reservoir.
Unleased Mineral Rights
An unleased mineral interest is not subject to an Oil and Gas Mineral Lease.
V
Vertical Drilling
A drilling technique that bores a single well shaft vertically into the desired formation.
W
Wellbore Direction or Orientation
Wells are either drilled vertically or horizontally.
Wellbore Only
Sometimes operators sell “wellbore only” interests wherein the assignment of minerals or interest is for the single well only, to include only that production and reserves, from the spacing unit of the single well that was assigned, and no other mineral or royalty interests beyond the single well spacing unit.
Work Over
Operations on a producing well to restore or increase production.
Royalties and Mineral Rights
- Tax Sheltered Monthly Cash Flow
- No Management or Maintenence Requirements
- Performs like a Triple Net Lease NNN
- Insurance or Property Tax
- Ownership with Deed
Property Sponsorship
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