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BONUS

The bonus is the amount of money that you will be paid in advance by the petroleum company as consideration for the oil?& gas lease. It is usually paid on a per net mineral acre basis. For example, lets assume that you are the owner of?a 50% interest in 250 acres and that the company is paying $150 per net mineral acre. To determine the total amount of bonus you will be paid, take the interest you own (50%) and multiply it times the total number of acres in the tract that the company is trying to lease (250 acres). The result (125 acres) is the number of net mineral acres that you own in that particular tract. Finally, multiply your net mineral acres (125) times the dollar amount that the company is paying per each net mineral acre ($150), leaving you with a total bonus of $18,750. This is a one-time only payment that will be paid at the time you sign the lease.

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ROYALTY

The royalty is your share of the profits generated as a result of the company's production of oil and/or gas from your leased property. Another way to look at it is that out of each dollar earned, the royalty is the amount out of that dollar that the company is required to pay to you. In the early days of petroleum exploration, a one-eighth royalty (12.5%) was standard. Today, one can expect to receive royalties ranging anywhere from one-sixth (16.667%) to one-fourth (25%). There are a number of factors that can affect the amount of royalty you receive, including what percentage of ownership you have in the land and whether or not your land is "pooled" with other tracts under the same well. Lets look at a few examples:

Example #1:

In this example, you own 100% of the minerals in the leased property, your lease states that you are entitled to a one-fourth royalty, and your piece of land is the only tract that the well will be producing from (ie. no pooling). In this simple case, you would be entitled to your full 25% royalty. So out of each dollar earned by the petroleum company from production, you would receive $.25. The company would thus keep $.75 out of each dollar earned. Determining royalties, however, is rarely this simple.

Example #2:

In this example, you own only 50% of the minerals in the leased property, your lease states that you are entitled to a one-fourth royalty, and your piece of land is the only tract that the well will be producing from (ie. no pooling). In this scenario, you would be entitled to only one-half of the full 25% royalty since you only own?50% of the minerals. The company earns each dollar from production on the entire tract,not just your percentage. So, if the owner of the other?50% of the minerals has a lease for only a one-eighth royalty (12.5%),?you would?receive $.125 out of each dollar?(50% of $.25) and?the other owner would received $.0625 out of each dollar (50% of $.125). The company would thus keep $.8125 out of each dollar earned.

Example #3:

In our most complicated (and typical) example, you own 50% of the minerals in the leased property, your lease states that you are entitled to a one-fourth royalty, and your piece of land is combined with 3 other tracts to create a pooled unit under the same well. If your tract is 100 acres and the other 3 other tracts are a combined 300 acres, you have a pooled unit of 400 acres.? With one well, the company is earning each dollar from production on every tract in the pooled unit. This is where determining royalty gets a bit more complicated. As we saw in Example #2, if there was no pooling, you would be entitled to $.125 out of each dollar. With pooling, however, your land comprises only 25% of the total pooled unit (100 acres divided by 400 acres). So you are only entitled to 25% of the $.125 out of each dollar, for a total of only $.03125 out of each dollar earned.?

Thus, the moral of the story is that you want to own as much of the minerals as you can under your particular piece of land, and you want as little acreage as possible combined with your tract in a pooled unit. While you can limit the size of a pooled unit within your lease, you will rarely be able to forbid it all together. Pooling is used by petroleum companies to protect their finds without having to drill numerous, expensive wells. Because it is a way to promote exploration and production across the state, pooling is a necessary evil of the industry.?






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