Oil and Gas right basics

One of the rights that most Americans enjoy along with their property rights is that of mineral rights or the right to be able to excavate what is under the land and make a profit from its sale. Most people do not realize or care about these rights until someone comes asking about them. Then, everything changes.

It is usually an oil company that either sends a letter or calls to express interest in leasing your minerals because they have reason to believe that they can find oil or gas there. You can then decide that in exchange for an up-front lease bonus payment, along with a royalty percentage of the value of any production, that you grant the oil company the right to drill and produce what is found below your land. In some cases, drilling never occurs and the lease is left to expire. However, you need to expect that a well may, in fact, be drilled.

If and when the oil company decides to drill, it may drill on your tract. As a surface owner, the oil company will likely suggest a site on which to drill. They will then notify you and offer to pay for damages that may occur on the surface, road usage, pipelines, etc.  Drilling may last anywhere from 10 to 90 days or longer. Completion of the well including perforating, hydraulic fracturing, installing production equipment and the like can take a similar amount of time.

As required by law, all oil and gas that is produced must be measured prior to leaving the well site. The gross volume from which you receive your oil royalties is calculated is based on this measurement. The customary industry standard requires that the Operator verify the measurements through a check meter for gas.  He or she can also check the levels in the oil storage tanks. If you are concerned about being shorted or cheated, bear in mind that it is in your Operator’s best interest to ensure proper product measurement.

When you receive your royalties, there may be deductions taken for making the oil and gas ready for sale. Common deductions include those for compression, dehydration, and removing impurities from gas.

It is in your best interest, when selling mineral rights, to ensure that there is a clause that allows you to negotiate, at least monthly, the price that the gas and/or oil are sold at. These are considered commodities and the prices are based on The New York Mercantile Exchange or (NYMEX) and are subject to daily swings in their value in the marketplace.

Bear in mind that Uncle Sam will stake his claim. State governments generally levy a severance tax when natural resources like oil and gas are severed from the earth. In general, the First Purchaser is responsible for collecting and accounting for this tax. It is usually collected during the normal monthly accounting cycle and should be easily calculable. It should also match the deduction shown on your royalty check stub. In addition, in many states, county governments collect a yearly ad valorem tax on producing minerals which owners are usually assessed and billed for annually.