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Investors and mineral owners often wonder, "How to calculate oil and gas royalties?" This makes them think twice before they accept royalty payments. Calculating oil and gas royalty payments helps investors and mine owners achieve the best positive returns. Whether you are an expert in mineral investment or a new investor in the energy industry, knowing about royalty payment calculations is requisite for maximizing financial returns and ensuring desired compensation.
This piece will assist you with how to calculate the oil and gas royalty payments. You will find various factors that influence royalty payments, as well as primary concepts and formulas to determine royalties.
Let's start with an introduction to oil and gas royalty.
Introduction to Oil and Gas Royalty
To understand royalty payment calculations, you must first understand the concept of oil and gas royalties!
Oil and gas industries are significant players in enhancing the nation’s economy. These industries support the overall nation’s growth as well as an individual financially. The individual with mineral rights or mineral land receives the financial share in the form of royalty. The person with minerals beneath the land he has shall be eligible to receive a royalty. The oil and gas royalties are a kind of share in the revenue generated from the production and sale of the oil and gas.
The landowner with mineral rights will get such a share only if he permits oil and gas companies to extract minerals from his land. The company extracting the minerals needs to deliver a share of the overall profit. That share is for mineral owners and is referred to as a royalty.
When the mineral owner agreed to allow his land for extraction and exploration to the company, there came an agreement. This legal agreement is between the mineral owner and the company. The mineral owner becomes a lessor (one who permits his land for exploration), and the company becomes a lessee (one who provides the share from profit).
The owner receives royalty in the type of interest. Some may receive working interest, whereas others may get royalty interest. There is also non participating royalty interest. Some mineral owners also engage in overriding royalty interest. These royalty interests are based on the potential of the minerals and legal terms in the agreement.
Oil and gas royalties provide supplementary financial gain to the mineral owner, independent of their active involvement in exploration or extraction operations.
About Oil and Gas Royalty Payment
As we mentioned above, the mineral owner receives the royalty in the form of shares, also referred to as Royalty Payments. Along with mineral rights owner, these payments are also provided to a party having ORIs (overriding interests). They perform the work as compensation for permitting oil and gas companies to extract and explore minerals beneath the land.
These royalty payments are given on a percentage basis. Such a specific percentage is calculated in the agreement. The standard percentage for royalty payments ranges between 12.5% to 25% of the total profit generated. This percentage may fluctuate depending on the terms of the agreement. Both entities involved in the agreement should decide on an appropriate percentage rate to avoid any conflicts during royalty payments. The lease agreement specifies the royalty payment rate; the mineral owner may validate calculations.
How to Calculate Oil and Gas Royalty Payments?
Even though calculating oil and gas royalty payments may require additional effort and time, it will ensure you receive the desired royalty payments. The calculations can be carried out using several methods. It is contingent on the terms and conditions highlighted in the leasing agreement.
The table below will help you understand the multiple methods of calculating royalty payments.
| Royalty Calculation Methods | How do They Work? | Formula to Calculate Royalty |
Revenue-Based Calculation | The royalty payments are calculated based on the revenue obtained from oil and gas sales. It includes employing the agreed-upon royalty rate to the gross revenue received by the energy company. | Royalty Payment = (Royalty Rate) x (Gross Revenue) |
| Price-Based Calculation | The royalty payments are calculated based on current oil and gas market prices. It includes continuously verifying and observing ongoing market prices. | Royalty Payment = (Royalty Rate) x (Volume Produced) x (Price of Oil or Gas) |
| Net Back or Net Revenue Calculation | The Royalty payments are calculated by deducting certain terms from royalty rates. The deduction of certain terms includes transportation expenses, processing expenses, and other expenses. The mineral owner receives the royalty payments after deducting the above terms from royalty rates. | Royalty Payment = (Royalty Rate) x (Net Revenue) (Net revenue is the gross revenue minus allowable deductions) |
| Production Volumes-Based Calculation | The royalty payments are calculated based on the volume of oil and gas generated. This perspective can be advantageous when there are major fluctuations in market prices. | Royalty Payment = (Royalty Rate) x (Volume Produced) |
The specific method that can be utilized during the calculations of oil and gas royalty payments should be distinctly mentioned in the leasing contract. The lessor and lessee both should be aware of it.
It is crucial for ORI (Over-Riding Interest) holders and mineral owners to understand which one of the above methods can be put into service for their scenario.
Conclusion
The oil and gas royalties strongly contribute to enhancing the state's economy. It becomes advantageous for an individual to receive royalty payments and intensify his financial landscape. The royalty rate may depend on the production of minerals and sales in the market.
If you want to know more about current oil and gas leases, well data, or mineral owner names, you can visit the Railroad Commission (RRC), county office, or private mineral data websites such as Mineral View, which can provide standard or customizable data hassle-free.
Due to drilling and exploration, oil and gas royalty payments are now widespread across the state and will remain so as long as the operations continue.