Oil/Gas/Different Fractional Mineral Rights
QUESTION: Mr. Williams,
I have three contiguous plots of land but only have mineral rights on two of those plots. I own all the mineral rights on one so that position is rather clear for negotiations.
On the smallest plot, approximately, 27 acres I own 29/32 oil and 1/4 gas mineral rights. The contract is for oil and gas rights but the company is only offering me 1/4 mineral rights for the lease rate and 1/4 for the royalty.
My geographic area is desirable because it has wet gas and they plan on selling both oil and gas products. I realize the main focus for drilling is for natural gas but I maintain I should at least receive 1/8 more towards the total mineral rights payment for a total of 3/8.
I have already negotiated a royalty rate of 18% for the plot I own 100% of the mineral rights and may pursue a higher royalty rate of 25% if they do not increase my fractional mineral rights.
Hopefully I didn't make this question too confusion but in case I did. Here is a summary:
Own: 29/32 oil and 1/4 gas mineral rights
Contract is for Oil & Gas: Only getting 1/4 of the total mineral rights ownership on the contract
My Position: I should get at least 1/8 more of the mineral rights ownership but I would like 1/4 due to the significant oil mineral rights ownership.
ANSWER: Mr. Johns,
The situation is currently in your favor. You are entitled to 25% or 1/4th of the gross product of 100% that comes out of the ground on the parcel in which you own all the minerals. In the parcel in which you own 29/32 of the oil your breakdown is as follows:
29/32 is equal to 90.625%
This means you will be entitled to 25% of the gross product of 90.625% of what comes out of the ground on oil. Some other individual out there owns the other 3/32 or 9.375% and they will receive the royalty on that. You have the lion's share of the revenue on oil.
On natural gas, and gas liquids, you will receive 25% (1/4) royalty on your 25% of the natural gas that is produced and sold.
Bottom line is: You are entitled to 25% on what you own whether that be 29/32 of oil or 1/4 of the natural gas....you will receive 25% of the revenue on what you own.
Think of the lease in the following terms:
1. What royalty am I receiving on produced oil and gas? 25%
2. What bonus am I receiving for signing the lease? (Could be from a couple hundred dollars per acre that you own up to a couple thousand depending on where the property is and how prolific hydrocarbons are in the area)
3. What is the primary term of the lease?
Feel free to ask any follow-up questions that this might raise.
---------- FOLLOW-UP ----------
QUESTION: They are offering $2000 per acre for the lease period of 5 years. On the plot with 27 acres their signing bonus offer to me is $13,500 based on a total of 1/4 mineral rights. The royalty rate they are offering me is only 1/4 of the total mineral rights period. In other words if $100,000 worth of minerals are extracted at the well head then I would receive $4,500 in royalties and the other royalty owner would receive $13,500 if they negotiated the same 18% royalty fee.
Not sure how to negotiate different royalty fees and signing bonuses for different fractional mineral rights on the same plot.
I really appreciate your help.
ANSWER: You are confusing a couple different issues. There is only one royalty amount - 25% the difference is that you own one percentage of the oil minerals (90%) and a different percentage of the gas minerals (25%)
On oil you have 90% of the mineral estate. If $100,000 is produced in oil then you would receive $22,500 which is 90% at the 25% royalty. In the same situation on gas - if $100,000 is produced you would be entitled to $6,250 in royalty revenue.
The royalty on both is 25% and you can't change (unless you buy out the other mineral owners) the amount of minerals you own.
$2,000 per acre is good
25% or 1/4 royalty is good (I'm not sure where you get the 18% because in the original question you mention that your royalty rate is 25% (see summary point #1 above)
Try to remove from your thoughts that you own different amounts of the mineral estate and focus on the royalty they are offering. You can effect that number but not how much of the minerals you own.
---------- FOLLOW-UP ----------
QUESTION: I am making this hard and I apologize.
I will use percentages for royalties and fractions for mineral rights. The company is only offering me 25% of $2000 per acre signing bonus which they tie to my 1/4 gas mineral rights. The royalty they want to give me for that plot is 18% of my 1/4 gas mineral rights regardless of the which minerals are extracted. No where in the contract do they acknowledge the different fractional rights. I agree if they are extracting both oil and gas I should only be compensated for what I own.
This is the position I gave to the Oil & Gas Company and I am supposed to speak to the Land Supervisor later this week.
Their signing bonus is solely based on my mineral gas rights which I politely disagree with.
Thank you for your patience and counsel.
That breakdown make sense but the oil company's interest in paying you bonus only on the gas is not right. I agree.
They are only offering the bonus on the 1/4 interest you own in the gas. So you would ask ti strike oil from the lease. If they obtain any oil (and tell them natural gas liquids - without regard to whether they are sold as gas or oil) and natural gas liquid called condensate should excluded from the lease.
If they want oil and the condensate they should pay you $2000 per mineral acre for the oil interest. Hopefully the land manager can make some sense of why they are only offering bonus on the gas.
Thanks for the clarification.