Major Elements of Minning.....

 The five elements of a mineral right are:

•     The right to use as much of the surface as is reasonably necessary to access the minerals

•     The right to further convey rights

•     The right to receive bonus consideration

•     The right to receive delay rentals

•     The right to receive royalties

The owner of a mineral interest may separately convey any or all of the above-listed interests. Minerals may be possessed as a life estate, which does not permit a person to sell them, but merely that they own the minerals so long as they live. After this, the rights revert to a predesignated entity, such as a specific organization or person.

It is possible for a mineral right owner to sever and sell an oil and gas royalty interest, while keeping the other mineral rights. In such case, if the oil lease expires, the royalty interest is extinguished, its purchaser has nothing, and the mineral owner still owns the minerals.
 

Mineral rights leasing

An owner of mineral rights may choose to lease those mineral rights to a company for development at any point. Signing a lease signals that both parties agree to the terms laid out in the lease. Lease terms typically include a price to be paid to the mineral rights owner for the minerals to be extracted, and a set of circumstances under which those minerals are to be extracted. For instance, a mineral rights owner might request that the company minimize any noise and light pollution when extracting the minerals. Leases are usually term-limited, meaning the company has a limited amount of time to develop the resources; if they do not begin development within that time-frame they forfeit their right to extract those minerals.

The four components of mineral rights leasing are:

•     Ownership

•     Leasing

•     The Division Order

•     The Royalty Check

Ownership

There are three distinct but related aspects of ownership. They are:

•     Legal description

•     Net mineral acres

•     Ownership type

Ownership Types

Ownership of oil and gas interest are a bit more complicated than other types of real property, as there 4 main types, with different obligations to the owner of the interest. The four common types of mineral interest ownership  in a well are:

•     Royalty Interest (RI): A percentage of production value that the mineral owner receives from oil & gas production as stated in the lease agreement. The royalty is paid by the lessee (producer) to the lessor (property owner) once the well is producing. Generally, the royalty interest owner is not required to pay costs to drill or operate the well, this is a major advantage over a "Working Interest". However, depending on the lease terms there may be post-production charges applied to the royalty interest for the royalty owner’s share of getting the hydrocarbons from the wellhead to a buyer. These post-production charges are applied as deductions (negative values) in the royalty statement details and you can often see the aggregated amount of deductions at the bottom of the royalty statement.

•     Overriding Royalty Interest (ORRI): A royalty in excess of the royalty provided to the mineral owners in an oil and gas lease. These do not affect the mineral owners. An example could be a geologist or a landman given a 1% ORRI by the operator in exchange for subsurface analysis or title work.

•     Working Interest (WI): A type of ownership where both costs and revenue are shared based on the percentage of ownership. Costs include drilling, prepping the well for production (completion), and ongoing operating expenses. Often the percentage of shared costs is higher than the percentage of shared revenue for WI owners. This is because of the need to pay royalty interests that don’t also bear the drilling and operating costs.

•     Non-Participating Royalty Interest (NPRI): This interest type is similar to a normal royalty interest in that these interest types do not bear costs to drill or operate a well. However, the interest owner does not have executive rights to make decisions such as leasing and they typically do not receive lease bonuses. NPRI’s are often created when a mineral owner wants maintain the ability to make decisions regarding their mineral rights and royalty interests while monetizing part of their royalties or leveraging a portion of the interest in negotiations.

Leasing

To bring oil and gas reserves to market, minerals are conveyed for a specified time to oil companies through a legally binding contract known as a lease. This arrangement between individual mineral owners and oil companies began prior to 1900 and still thrives today. Before exploration can begin, the mineral owner (lessor) and the oil company (lessee) must agree to certain terms regarding the rights, privileges and obligations of the respective parties during the exploration and possible production stages.

Although there are numerous other important details, the basic structure of the lease is straightforward: in exchange for an up-front lease bonus payment, plus a royalty percentage of the value of any production, the mineral owner grants the oil company the right to drill for a period of time, known as the primary term. If the term of the oil or gas lease extends beyond the primary term, and a well was not drilled, then the Lessee is required to pay the lessor a delay rental. This delay rental could be $1 or more per acre. In some cases, no drilling occurs and the lease simply expires.

The duration of the lease may be extended when drilling or production starts. This enters into the period of time known as the secondary term, which applies for as long as oil and gas is produced in paying quantities.
 

The division order

A division order is not a contract. It is a stipulation, derived from the lease agreement and other agreements, as to what the Operator of a well or an oil and/or gas purchaser will disburse in terms of revenue to the mineral owner and others. The purpose of the division order is to show how the mineral revenues are divided up between the oil company, the owners of the mineral rights (royalty owners) and the overriding royalty interest owners. The Division Order needs a signature, a current address and social security number for individual royalty owners or tax identification number for companies.
 

Oil and gas lease

An oil and gas lease is a contract because it contains consideration, consent, legal tangible items and competency.

•     The term of the lease. Usually there is a primary term and a secondary term. Each term has conditions set up either by the lessor or lessee to fulfill.

•     The royalty rate. This is how the rates are divided and how it is calculated from the revenues produced from the mineral rights.

•     If the lessor receives a bonus

•     If there is a delay rental agreement—any delay in production by the lessee for a negotiated period, the lessee can pay the lessor a negotiated amount of money per year to keep the contract active

•     If there is a "shut-in royalty" agreement—royalties are paid at a negotiated rate per acre, only while the well is not producing oil or gas

Many other line items can be negotiated by the time the contract is complete. The rights of all parties are defined in agreements; and, when mineral production begins, the division order states how much revenue goes to each party involved.
 

Royalty check

Mineral owners may receive a monthly royalty check if oil, gas, or any other substances of value are extracted from below the surface and either sold or used by an oil and gas operating company. Royalty statements include the production and revenue figures for both the individual owner and the entire well. The royalty paid is a function of the net value of the proceeds from the sale of the oil, gas, or other substance, multiplied by the owner's revenue interest decimal, less any amounts deducted for taxes or other deductions.

The revenue decimal used to calculate the amount of an owner's royalty check is calculated with the following equation:

•     A = Net Mineral Acres owned

•     U = Number of Mineral Acres in the oil and gas drilling unit or pool

•     R = The Royalty assigned to the mineral right owner by the oil and gas lease covering his or her minerals

•     P = Participation Factor assigned to the tracts owned by the mineral owner as described in a unit agreement

•     Y = Additional Ownership Factor assigned to the owner's mineral rights by any other arrangement or agreement

•     D = Deductions

Revenue interest decimal = ( A / U ) ∗ R ∗ ( P ∗ Y − D ) {\displaystyle =(A/U)*R*(P*Y-D)} {\displaystyle =(A/U)*R*(P*Y-D)}

It is common for royalty checks to fluctuate between pay periods due to monthly changes in oil or gas prices, or changes in the volumes produced by the associated oil or gas wells. Additionally, royalties may cease altogether if the associated wells quit producing marketable quantities of oil or gas, if the operating company has changed hands and the new operator has not yet established a new payment account for the owner, or if the operating company or product purchaser is missing appropriate paperwork or proper documentation of changes in ownership or contact information.