• What do you need to know before signing an oil and gas lease?
    • You will want to make sure that the lease you are signing reflects the terms you have negotiated on the lease, including:

      1. The lease term determines how long the lease will run. An oil and gas lease has two different terms, the primary term and the secondary term. The primary term is negotiated upon for a number of years and/or months. The secondary term comes after the primary term. This is for a period of time that fulfills a circumstance. Usually a secondary term will be stated so long as the land is still producing oil and/or gas.

      2. The royalty rate is also something which is negotiated. The person owning the minerals (the lessor) receives a royalty interest from the production and revenues made from the leased minerals. You will see most royalties given as a percentage of the revenues. Most lessors get a negotiated royalty interest rate between 12.5% to 25% of the revenues.

      3. • A bonus is the upfront cash payment on an oil and gas lease contract. This is also quite negotiable and is typically paid based on the number of net mineral acres owned. The price of a bonus depends on many factors.

      4. A delay rental agreement can also be negotiated on. However, most lease contracts are ‘paid up’ oil and gas leases in which the delay rentals are ‘paid up’ as part of the bonus. In modern times, delay rentals are rare, though not unheard of. Basically a delay rental states that if the lessee (the oil company) doesn’t produce oil/gas on your land then you can get a delay rental payment. The terms are usually expressed that if there is no production done by the lessee, then they will pay you ‘rental’ money per year during the primary term to keep the contract active.

      5. • Also negotiate on a “shut-in royalty”. A shut-in royalty is when the lessee (the oil company) pays the lessor (the lease owner) a royalty at a negotiated rate per net mineral acre, while the well is not producing oil or gas. These are usually on a fixed term no longer than one year.

      Read the Lease Carefully

      You want to make sure that everything that was negotiated is reflected in the lease agreement you are signing. If the division order does not reflect the negotiated terms of your lease, you will want to check to make sure that the company doesn’t attempt to remove negotiated protections of your ownership interest. If you are a potential lessor, make sure a mineral rights expert looks over, acknowledges, and possibly negotiates any changes before signing a finalized contract.

  • Should you seek legal advice for the lease which determines the content of the division order?
    • An experienced oil and gas attorney is always your best bet when it comes to a signing a lease before getting a division order to sign. To make sure that your interests are protected you should consider consulting an attorney. Your attorney will be able to tell if everything is in order.

  • What is a division order?
    • Often with oil and gas mineral rights, a well will be owned by multiple persons or entities. A division order specifically details the individual mineral owner’s ownership interest in an oil and/or gas well. The decimal/royalty interest signifies how much of the revenue a specific mineral owner will receive as a result of the proceeds that come from the sale of the product the oil and/or gas well produces. Usually royalties will not be distributed to an owner until that owner has signed a division order.

  • What do you need to know before signing a division order?
    • Check the math. When signing a division order make sure you check the oil and gas companies’ math – you don’t want to sign something that mistakenly gives you less money. You will want to make sure that it reflects what you have negotiated on the lease. Your division order will have your NRI or net revenue interest, stated. This is your percentage share of the proceeds from the sale of the oil and gas from the well or unit described in the division order.

  • How is the NRI on a division order calculated?
    • An example: Joe and Diane Royalty Owners leased their undivided one-half mineral interest in 40 acres to XYZ oil company with a one-fifth (1/5) royalty. XYZ oil company pooled the 40 acres into a 640 acre unit. To calculate the NRI, multiply the tract size (40 acres) by the percentage of ownership (50%) by the royalty rate (1/5) and then divide by the unit size (640 acres). So in our example the calculation is: (40*.5*.2)/640. This gives an NRI of .00625.

  • What is a Non-Participating Royalty Interest?
    • A Non-Participating Royalty Interest (NPRI) is a right that has been carved out of a mineral estate in which the owner of the NPRI is entitled to receive a pro rata share of the royalties attributable to a specific tract of land. That means the interest holder does not receive any part of bonuses, rental payments, surface damages, or shut-in payments. They only get the designated percentage of royalties. Further, non-participating means that the interest owner does not have the right to execute an oil and gas lease.