Important Tips to Leasing Mineral Rights

As a mineral owner, the most important factors in the lease are the property’s production, performance, cash flow and longevity.

Oil & Gas Leases

Lease agreements are made between the mineral rights owner and an operating company. The agreement gives the operator the right to produce oil and gas from the property. The amount of the royalty is established in the lease. In some cases, drilling does not occur within the time period specified in the lease and the lease will expire.

Operator

The oil company which manages the production operations is referred to as the operator.

Drilling & Completion 

Once the operator has decided to drill, they will select the location of the drill site, which may or may not be on a specific mineral owner’s land. The oil company will prepare the drill site, notify the surface owner, and offer compensation for any damages related to the utilization of the surface land. Once the well has been drilled, completion practices may begin, including but not limited to, perforating the well, hydraulic fracturing, and the installation of production equipment.

Production

After drilling and completion practices, the well can go into production. Production rates are measured in BOPD (barrels of oil per day) and MCFD (measurement of cubic feet per day) depending on whether the production is of oil or gas. Production rates typically decline more quickly in the early stages of production. Decline curves are used to predict future production of wells.

Measurement of Hydrocarbons

Oil and gas are measured prior to leaving the well, as mandated by law. Royalty share is calculated based upon this measurement of gross volume.

Deductions

From the gross volume (and each owner’s royalty share), deductions are taken for prepping the produced hydrocarbons to be ready for sale. These deductions could include, but are not limited to, costs associated with removing impurities from gas, compression and dehydration.

Oil & Gas Prices

Natural gas and crude oil are commodities, so their values are subject to change daily. NYMEX is a primary source to monitor these changes. The price that the royalty owner and oil companies receive is often a contracted price set each month.