Investor Resources > Oil & Gas Facts for Mineral Owners

Fast Facts about Oil & Gas Leasing for the Mineral Owner

The Division Order:

After title is cleared, a document called a Division Order is sent your way. This contains a legal description of the property, a statement of your decimal interest, the name of the operator of the well, and some legal statements. You are asked to sign this.
Some D.O.’s however, attempt to amend the terms of the lease, particularly in natural gas areas.

Read “Look Before You Lease,” the NARO official guide, and then seek a lawyer to prevent future problems from these of D.O.’s. Usually you will receive two Division Orders if both oil and natural gas are sold from the well.

You are required by federal law to verify or furnish you tax identifications number in order to receive full payment of royalties. Otherwise, 20% is withheld and sent to the IRS.

Most companies will attempt to withhold payment until you sign the D.O., so take prompt action to settle any problems.
Oklahoma, Texas, North Dakota, Wyoming and Utah have legislation that prohibits the division order from altering the terms of the oil and gas lease.

The Transfer Order:

If there are irregularities, such as a change in your ownership, you must request a “Transfer Order” from the purchasing company to set the record straight.

This would be needed if you transfer or assign your interest, have a marital status change, or a death, and alteration of the decimal interest or a change in property boundaries.

Selling the Stuff:

There are sizable differences in the way oil and gas are sold and accounted for.

Oil usually flows or is pumped through lines into a separator that splits apart oil, gas, and water.

Gas is usually metered and taken from the lease by a pipeline owned by the purchaser or a third party. Oil is placed in lease tanks.

Oil is then hauled from the lease by either a truck, rail tanker or pipeline. Generally, a sale is considered “made” when oil is removed from the lease. Gas is measured in thousand cubic feet quantities and is considered "sold" when it passes through the gas metering device. The sales value for gas is commonly refered to as a certain price per MCF (thousand cubic feet).

Data pertaining to these sales are called “run tickets.” These determine your rate of pay.

Your Royalty Check:

There are technically many categories of natural gas. Contract terms on this commodity can mean that wells side by side may sell their gas at vastly different prices.

Oil, on the other hand, sells on a per bbl. (42 gallons) basis at generally the same price range, adjusted for gravity and grade (sweet/sour).

Various taxes are withheld from your check, so audit them carefully.

Remember, since January of 1984, the federal government demands that 20% tax be withheld if you have not furnished a Taxpayer Identifying Number to the company making payment. This is either your Social Security number or Federal Tax I.D. number, so don’t overlook this when it’s requested.

Historically, royalty payments were free and clear of charge other than taxes withheld. Some gas leases, however, allow a deduction for processing and transportation. Some pay with these deductions despite terms of your lease. NARO has fought such actions in many states.

When you get your royalty check, detach and save the stub data for your records. When you question an item on this check, refer to the division order number and state code number in any inquiries. It’ll be on the check stub. Give your name as stated specifically on the check.

Most companies usually pay on the 25th of the month for oil sold he prior month. Gas royalty payments are usually made on the 15th for sales made two months prior because of the complicated nature of natural gas measurement and accounting.

You’ll notice that the amount of your monthly checks will vary enormously from time to time. This can be explained by several variables.

Seasonal conditions affect sales demand. In winter, some leases also become inaccessible. Thus oil can’t be trucked from the property. Further, testing and workovers (clean-ups. for example, of the well bore) also cause irregular payments. One reason for reduced price and spotty payments is that when wells get old, production drops. Oil from these properties may run from the holding tanks only every few months or so – thus skipped checks.

Natural gas production suffers the greatest in irregular payments. At this writing many wells are either shut-in (closed down) for lack of demand or selling the product only when the peak gas-use months occur in the mid of winter.

What is an Oil and Gas Lease:

The oil and gas lease is the basic contract that authorizes exploration for oil and gas. It is important. Never sign one without serious thought and professional advice.

In brief, the lease gives a company or individual, called the lessee, the right to enter upon the surface of your land and to drill for and extract oil and gas.

This right exists whether you own both surface and mineral rights, or simply the sub-surface.

The whole process is governed both by the language in a lease and by laws of your state.

Be aware that there are hundreds of forms of printed leases. Many are called a “Producer’s 88”. Others claim to be endorsed by a so-called Mid-Continent Royalty Owners Association. It doesn’t exist. These titles mean nothing.

Often leases are printed by individual oil companies to protect their own interests. Few preprinted forms exist that fully meet the needs of the mineral owner. There is, thus, usually the need to modify a lease to fit your own needs.

Leases in areas of heavy natural gas production particularly require a great deal of special treatment.

Dollar Elements of a Lease:

Following are the dollar ingredients in a lease offer.

Cash Bonus- In most of the nation it is common practice to be offered cash as a “bonus” if you sign a lease. This can range from $5.00 up to $500.00 or much more. This payment authorizes the lessee or company use of your mineral acreage for a given period of time.

The amount of bonus is computed on a per acre basis. Thus, when you are offered a $25 bonus, it means you’ll get $25 per acre if and when you sign. Payment usually is in form of a time draft that will be honored after your title to the property is checked by the leasing company.

Lease Royalty- If oil, gas or other minerals are produced from your property, you become entitled to a share of that production, called a “royalty.”

This is usually expressed in the lease as a fraction – such 1/8th, 1/6th, 3/6ths, or even 1/5th. (Divide the bottom number into the top number to figure comparable percent.)

Lease Terms- the so-called “primary term” of a lease is the ninber of years that it will be in effect. This can range from 1 year up to 10 years, or even more. Three years is now the most frequent. The shorter the term, of course, the better the chance you have to lease again, with additional bonus, if they don’t drill.

The duration of the lease can be extended only if drilling or production occurs. This is called the “secondary term.” It means the lease is held by production or “HBP.” When production ceases, the lease expires soon therafter.

Many leases will also call for an additional fee or “delay rental” to be paid on or before a certain date each year. T his is usually on the “anniversary date" of when you signed the lease. It is usually for less than $10 per acre, more often $1 to $5. When such rentals are prepaid with the bonus, it is called a “paid up lease.”

Failure by the company to pay the “delay rental” causes the “non-paid-up” type of lease to terminate unless production is obtained or drilling is evident.

Surface Damages:

By strict letter of the law, you signed over permission (with your lease) for use of a reasonable portion of your land to conduct drilling and production operations.

In practice, however, the surface owner is often compensated for “damages” and “for use” of the acreage and roadway involved in drilling and production operations. Clauses spelling out your specific needs should be negotiated in the lease, according to the practices of your area. You power is limited severely if you no longer own the surface rights.

Because mineral interest and surface interests are often “severed” or have been sold separately, this causes confusion.

The laws of the nation usually rule that the mineral interest is dominant to the surface interest. This means “minerals” have favorable standing. Many court cases arise over such disputes, so proceed with caution.

Spacing Units:

Conservation laws of most states allow small tracts of land to be lumped together to create a drilling unit. These are formed by exploration companies subject to review and approval of state agencies. Single well units may range in size from under 10 acres to 640 acres or more. Shallow wells are usually spaced more closely together, deep wells further apart.

If your leased acreage is put into such a spacing unit, you will share proportionately in the production. This will be calculated on the ratio that your mineral acres bear to the total unit. Thus if you own 10 acres, and are in a 40 acre unit, your income will be figured as 1/4th (10 acres is one fourth of 40 acres) of the unit’s production multiplied times your royalty interest. Thus we have 1/4th x 3/16ths of production in such an example.

It is usually to a mineral owners’ advantage to have close spacing – thus more wells.

Force Pooling:

Most states (with the exception of Texas) have workable force pooling laws. This means mineral acreage can be lumped with others into a legal spacing unit and drilled, despite non-consenting mineral owners or those that can’t be located.

After a pooling application is filed, a hearing is held by the state which will determine the market value of the lease. Attend those sessions if you wish to protest the terms as unfair. If you are unleased, you will usually be given three options.

You can either (1) sign a lease and take the offered bonus and royalty interest, (2) decide to not sign and be force pooled under the lease terms of the application established as fair by the state, or (3) elect “to participate” in the wall and pay a proportionate share of the costs of drilling and completion for a pro rata payout as a working interest owner. If you do nothing you will be deemed to have accepted the terms approved by the state.