Mineral rights and oil and gas royalty glossary

B

Bonus (lease bonus)

A one time, up front payment to the mineral owner for signing an oil and gas lease, usually quoted per net mineral acre. It is separate from, and in addition to, any later royalty.

C

Chain of title

The recorded history of ownership of a tract or mineral interest, traced through deeds, leases, probates and other instruments to establish who owns what today.

Compulsory pooling (forced pooling)

A state process that pools an owner who has not voluntarily leased or agreed into a drilling unit, allowing development to proceed while protecting that owner's right to a share of production.

D

Delay rental

A payment that lets the operator defer drilling during the primary term without ending the lease. Many modern leases are paid up and carry no delay rental.

Depletion

An income tax deduction that lets a mineral or royalty owner recover the value of the resource as it is produced and sold. The two common methods are cost depletion and percentage depletion.

Division order

A document from the operator or purchaser confirming each owner's decimal interest before payments are released. Signing it confirms ownership for payment; it does not change the terms of the lease.

Dormant minerals

Severed mineral interests that have shown no use, payment or recorded activity for a period set by state law. Several states allow such interests to lapse back to the surface owner unless the mineral owner preserves them in time.

Drilling or spacing unit

The acreage assigned to a well by regulation or agreement, across which production and royalties are allocated. A unit is often a 640 acre section or a multiple of it, but unit size varies by state and formation.

H

Habendum clause

The lease clause that sets the primary and secondary terms, defining how long the lease lasts and what keeps it alive after the primary term.

Held by production (HBP)

A lease or unit that stays in force beyond its primary term because a well continues to produce in paying quantities, or another savings clause applies.

M

Mcf and Boe

Mcf is one thousand cubic feet of natural gas. Boe, barrels of oil equivalent, expresses gas and other products as the energy equivalent of a barrel of oil so volumes can be compared on one scale.

Mineral estate

Ownership of the minerals beneath a tract, including oil, gas and other substances, together with the right to access and extract them. It can be owned separately from the surface.

N

Net mineral acres (NMA)

The mineral acres a person actually owns, equal to the gross tract acreage multiplied by that person's fractional mineral ownership in the tract. Owning a quarter of the minerals under 160 acres is 40 net mineral acres.

Net revenue interest (NRI)

A working interest owner's share of production revenue after royalties and other burdens are deducted from the gross.

Net royalty acres

A normalized measure of royalty ownership that standardizes interests to a common royalty rate, used to compare royalty positions that carry different lease rates.

Nonparticipating royalty interest (NPRI)

A royalty in production that does not carry the right to lease the minerals, take bonus or collect delay rentals. The holder shares only in production royalty.

O

Oil and gas lease

A contract by which a mineral owner grants an operator the right to explore for and produce oil and gas, usually in exchange for a bonus, a royalty and a defined term.

Overriding royalty interest (ORRI)

A royalty carved out of the working interest, free of drilling and operating costs, that expires when the underlying lease ends.

P

Pooling

Combining small tracts or interests into one drilling unit so a well can be drilled and production shared among the owners in proportion to their interest.

Post production costs

Costs incurred after the wellhead, such as gathering, compression, processing and transportation, that some leases allow the operator to deduct from the royalty before payment.

Primary term

The fixed initial period of a lease during which the operator may drill. If no production or qualifying activity occurs, the lease can expire at the end of this term.

Probate

The legal process of administering an estate after death, through which mineral and royalty interests pass to heirs or devisees and the title record is updated.

Pugh clause

A lease clause that releases acreage or depths not included in a producing unit, so that production on one part of a lease does not hold the entire lease.

Q

Quiet title

A court action to resolve competing claims and establish clear ownership of a property or mineral interest.

R

Reversion (lapse)

The return of a severed mineral interest to the surface owner under a dormant minerals statute when the mineral owner fails to act within the period the statute allows.

Royalty decimal (decimal interest)

The exact fraction of total production revenue an owner receives, stated on a division order, usually to eight decimal places. It equals net mineral acres divided by unit acres, multiplied by the lease royalty rate.

Royalty interest

A share of production, or of the revenue from production, that is free of the costs of drilling and operating a well. The royalty owner bears a share of production taxes and, depending on the lease, post production costs, but not drilling or operating costs.

Royalty rate

The fraction of production reserved to the mineral owner in a lease, commonly written as a fraction such as one eighth or three sixteenths, or as a percentage.

S

Secondary term

The open ended period after the primary term, during which the lease continues for as long as the well produces in paying quantities or another savings clause keeps it alive.

Severance (severed minerals)

The legal separation of the mineral estate from the surface estate, so one party owns the surface and another owns the minerals. Once severed, the two estates pass and are taxed independently.

Severance tax (production tax)

A state tax on the value or volume of oil and gas produced, taken before or from the owner's payment. Rates and rules vary by state.

Shut in royalty

A payment that keeps a lease alive when a well is capable of production but is temporarily shut in, for example for lack of a pipeline or a market.

Surface estate

Ownership of the land surface and the uses and structures on it. Where minerals are severed, the surface owner and the mineral owner can be different parties.

T

Term mineral or term royalty

An interest that lasts for a fixed term, and for as long after as there is production, after which it reverts to the grantor.

U

Unitization

Combining multiple leases or a whole reservoir into one operating unit, often to allow efficient recovery such as secondary or enhanced recovery across property lines.

W

Working interest

The operating interest in a lease that bears the costs of drilling and producing in exchange for a share of production. Working interest owners pay their proportionate share of expenses.

General information only, not legal, tax or financial advice. The meaning of a term in your lease, deed or order is governed by that instrument and by state law. Corrections go to offers@americanmineralregistry.com.