Mineral Owners’ FAQ


 
Frequently Asked Questions (FAQ) for mineral owners.

Categories:

Leasing and Landowners

Q: What is the difference between a working interest and a royalty interest?
A: A working interest and a royalty interest are created by the execution of an oil and gas lease. The holder of a royalty interest is entitled to a specified share of the proceeds of any oil or gas that is found on land on which they own the mineral rights. The working interest holders are the oil and gas company leasing the land along with other investors in the wells to be drilled, if any. The holders of the working interest are responsible for the costs of exploration, as well as production if any oil or gas are found and produced. Royalty owners are not responsible for exploration and production costs. Royalty owners are responsible for their share of the state severance tax, and possibly some post-production costs that are commonly found with gas wells.

Q: What is an overriding royalty interest and how is it different from a royalty interest?
A: Like a royalty interest, an overriding royalty interest is a revenue interest in an oil or gas well (or wells). An “override” is similar to a lessor’s (mineral owner’s) royalty interest in that an override entitles its owner to a share of the proceeds from gross production, free of the responsibility for exploration and production costs (but still subject to the state severance tax and possibly post-production costs). However, unlike a royalty interest, an overriding royalty interest does not involve the ownership of minerals and ends with the termination of an oil and gas lease. An overriding royalty interest is created (or carved) out of the working interest by the working interest owner, usually to reward the recipient for a specified reason.

Q: What is the bonus payment for and how is the amount determined?
A: The bonus is a cash payment to the mineral owner from the oil and gas producer or leasing agent to secure or extend an oil and gas lease. The bonus payment is usually quoted in dollars per acre and normally is not listed in an oil and gas lease document. The amount is based on whatever is the going market rate for lease signing bonuses in the particular area. The more competition there is for your land, the higher the signing bonus offer is likely to be.

Q: I have an oil or gas well on my property and the oil company’s operations have damaged my land. What recourse do I have?
A: Surface use and damages should be addressed in an oil and gas lease (for a landowner who owns both the surface and the minerals) or in a surface use agreement (for someone who owns only the surface). State laws differ, but in many cases oil companies have no obligation – unless specified in an oil and gas lease or surface use agreement – to compensate landowners for damages unless the company negligently or intentionally causes damages that exceed what is considered reasonable and necessary for oil and gas exploration and production. If you believe that oil and gas operations have caused unreasonable damage to your land, seek counsel from an attorney experienced in representing landowners.

Q: Can I still sign an oil and gas lease even if my neighbors refuse to lease their properties?
A: Yes. First of all, you are within your right to lease your property and collect income in the form of a signing bonus and royalty payments. Second, the oil and gas company can pool your acreage into a unit with other nearby leased properties so you can share in the royalties from the unit’s production even if your immediate neighbors refuse to sign a lease (provided of course that the presence of unleased tracts does not make it impossible to drill a well).

Q: Who regulates oil and gas production? Which agency do I call if there is a problem?
A: On private property oil and gas production is regulated by the states. State regulatory agencies enforce regulations, issue permits to drill, conduct inspections, and are responsible for responding to problems should they occur. If you believe there is a problem, you need to conduct the oil and gas regulatory agency in your state. You can find a contact list here.

Q: What is forced pooling? Is it allowed everywhere or just in certain states?
A: Forced pooling is when a state regulatory authority directs tracts where the mineral owner has been unwilling to sign a lease to be pooled into a unit with other willing mineral owners. Oftentimes forced pooling occurs when the the operator of a proposed well obtains the permission of the majority or certain threshold of the mineral owners in an area and the inclusion of the unleased tracts is necessary for the well to be drilled. While forced pooling is often depicted as unfair to unwilling mineral owners, it is to the benefit of the willing mineral owners who otherwise might not have their minerals developed. Forced pooling is a matter of state law, with states such as Oklahoma and Arkansas having forced pooling statutes, while other states such as Texas do not.

Royalty Payments

Q: How much money am I going to make each month from royalty payments?
A: It depends on a number of factors. What is the royalty percentage? What is the size of your property? Has your leased acreage been pooled into a larger unit? How many wells and how much oil and gas do they produce? What are the current prices for oil and gas? What are the types of oil and gas being produced (sweet or sour, wet gas or dry gas)?

Q: How does the oil and gas company determine the royalty percentage for my lease?
A: The local market. There may be other factors, but the the majority of the time, the royalty percentage offered will be in line with whatever is the going (royalty) rate in the particular area.

Q: What kind of charges or costs are deducted from my royalty payment?
A: The state severance tax on the value of oil or gas produced will be deducted on all royalty payments. Other charges can vary depending on the type of production and the terms of the lease, but with gas wells operators will oftentimes assess post-production costs that involve marketing, processing, or treating the natural gas produced.

Q: I’ve heard about post-production costs. What are they and why are they deducted from my royalty payment?
A: The assessment of post-production costs is usually found with gas wells since natural gas can require processing and treating before it can be sold into a pipeline. Oftentimes natural gas contains impurities such as water and possibly hydrogen sulfide that must be removed before the gas can be transported in a pipeline. In addition, in the case of “wet gas,” heavier gases such as propane and butane that condense into liquids at the surface must be separated from the “dry gas” – methane – before the gas can be sold to a pipeline. The processing, separation, and treating that can be necessary to make the gas marketable for sale are usually the post-production costs that are assessed to royalty owners unless such charges are expressly forbidden in the oil and gas lease.

Q: What is the severance tax that is deducted from my royalty payment?
A: Most states levy a tax on oil and gas production called a severance tax. The levy varies from state to state, with some states taxing a percentage of the market value of oil and gas sold while other states base their levy on the volume of production. In many cases the severance tax rates differ for crude oil and natural gas. Since the royalty owner owns a share of the production, the royalty owner is responsible for a share of the tax. The severance tax is paid to the state by the well operator, with the royalty owner’s share of the tax withheld (deducted) from their royalty payments.

Q: I have a quarter royalty (25%). However, the division order shows my net revenue interest percentage in a well to be far smaller. Why is this so?
A: Unless your property comprises the entire mineral acreage to be produced and you are the sole mineral owner of that acreage, your net revenue interest will be different – and smaller – than your royalty percentage. The larger the number of mineral owners in a tract of property to be produced, and the more tracts that are to be produced (as in a pooled unit), the smaller everyone’s net revenue interest will be.

Selling Mineral Rights

Q: What is the difference between leasing and selling my mineral rights?
A: Leasing means you will receive a share of the production of oil and natural gas produced from land where you own mineral rights. Selling your minerals means you are conveying the right to lease and receive royalty payments to someone else in return for a lump sum. If you lease and the lease expires, you have the right to lease again and receive a bonus and royalties. If you sell your minerals, you are giving up your ownership and thus your right to lease and receive royalties and bonus payments forever. That’s a big difference.

Q: Can I sell a portion of my minerals or do I have sell them all?
A: You can sell a portion of your mineral interest in a certain property and do not have to sell everything. If you sell a portion of your mineral interest, you will receive a lump sum for the portion you are selling, but by retaining ownership of some of your minerals, you can still lease and receive future income from the minerals you still own. Your mineral ownership in terms of net mineral acres will just be smaller.

Q: I received an offer to purchase my minerals. Why would I consider selling my mineral rights?
A: Indeed, there is an old adage to never sell your mineral rights. However, there may be circumstances in life where selling may make sense, particularly if a large and immediate financial need suddenly arises, such as unexpected medical bills. Another common reason for selling is sometimes people find mineral rights ownership to be a hassle that they would rather not deal with anymore. So, while retaining their mineral ownership so they can lease and receive future income is the way to go for most people, for others selling their minerals may make sense due to their circumstances, especially financial. The decision of whether or not to sell your minerals is entirely up to you.

Oil & Gas Operations

Q: How do they determine if there is oil or natural gas in a particular location?
A: Geological research and testing, as well as a history of oil or gas production in a particular area are what oil and gas companies use to determine where they will drill. In some cases, the presence of oil or gas in commercial quantities can only be determined by actual drilling. With shale formations, in most cases the presence of oil or gas is known; the challenge is getting it out.

Q: How long does it take to set up a well on my land? 
A: There is no single answer to this question. The length of time will vary depending on a number of factors such as: how much preparatory work must be done such as building an access road and clearing the site; how many wells are to be drilled; how deep the wells will be; are the wells vertical or horizontal; what will be involved in completing the wells, such as the use of hydraulic fracturing; in the case of a gas well, will a pipeline need to be constructed (if not in place).

Q:If there is more than one well, can they be drilled or fracked at the same time?
A: One drilling rig can only drill one well at a time, although the rig can remain on site to drill several wells, back-to-back. On the other hand, multiple wells can be hydraulically fractured at the same time.

Q: What equipment will be on my property and how long will it be there?
A: Some equipment is temporary, such as the drilling rig that will depart once the wells have been drilled. More permanent equipment that will be present on the site as long as there is a producing well, includes: the wellhead (Christmas tree), tank batteries, separators, heater treaters (for oil wells), pumping units (pump jacks) for oil wells, and compressors (for gas wells).

Q: How does horizontal drilling work?
A: A horizontal well is drilled by drilling the well from the surface vertically down to a certain depth and then (through the use of technology) gradually turning to a right angle and continuing to drill horizontally within the rock formation being targeted to produce oil or gas.

Environmental and Quality of Life Concerns

Q: Will the foundation of my house fall in if they drill underneath it?
A: No. The ground beneath your home is made up of layer upon layer of solid rock. Oil and gas are found in solid rock and the removal of oil or gas does not cause the rock to cave in. Furthermore, most oil and gas production takes place thousands of feet beneath the ground, with several layers of solid rock in between.

Q: How much noise will the well make?
A: Oil and gas production is an industrial process so there will be some noise. Drilling operations produce some noise, while hydraulic fracturing is probably the noisiest part of the process. Production should not involve much noise although there can be equipment such as compressors used for gas wells that do produce some constant noise. Oil and gas operators can employ measures such as the use of sound blankets to muffle the sound of their operations for nearby residents, particularly in more populated areas.

Q: Will having a well on my property or nearby make the air stink?
A: It shouldn’t, although considering oil and gas production is an industrial process, some smells are expected such as diesel exhaust from trucks and equipment such as drilling rigs.

Q: What about truck traffic?
A: This is probably the biggest complaint from nearby residents of an oil or gas well site. Traffic will be heaviest when getting the well site prepared and during drilling and hydraulic fracturing (if employed). Once a well is in production, traffic will taper off to trucks occasionally coming to remove wastewater from the site.

Q: Will drilling on or near my land cause my property value to go down?
A: A successful well should increase the value of a property due to the added value of proven producing minerals. The only negative potential would be if an accident were to occur that resulted in lasting environmental damage.

Q: Will having an oil or gas well on my property cause environmental damage to my land?
A: Hopefully not. Responsible oil and gas companies strive to ensure that their operations do not cause harm in order to be good neighbors and to comply with government environmental regulations. However, as is the case with all industries, sometimes accidents (usually human error or mechanical failure) do occur. Government regulations and inspections are aimed at trying to prevent mishaps.

Q: How do oil and gas companies reduce the environmental impacts of their operations?
A: As drilling operations have moved into populated areas, oil and gas producers have taken more steps to reduce the impacts of their operations on nearby residents. Oil and gas operators are employing measures including: the use of sound blankets surrounding well sites and equipment; the use of “closed loop” mud systems that negate the need for mud reserve pits; the use of electric instead of diesel engines to power drilling rigs; optimizing truck routes; and landscaping well sites to block noise, hide the site, or improve the aesthetics.