Definitions

Mineral Interest

Minerals are subsurface real estate, which are uniquely owned by individuals and corporations in the United States. When you own minerals, you own everything from the surface to the center of the earth - helium, coal, oil, natural gas, and other valuable deposits - regardless of production. Ownership is perpetual and allows the owner to execute oil and gas leases, enjoy bonus consideration, and revenue from wells drilled on the property.

Royalty Interest

A mineral interest becomes a royalty interest once the property is leased. Royalty interest owners never have to pay well costs, operating costs or plugging costs associated with wells, but still share in a well's revenue based upon their royalty rate (most commonly 3/16ths).

Working Interest

Working interests are cost-bearing interests as well as revenue-bearing interests. When a well is drilled, for example, the working interest owners will pay their share of the well costs, operating costs, and plugging costs proportionately reduced.

Overriding Royalty Interest

Overriding Royalty Interests are carved out of the Working Interest and allow the owner to receive a proportionate share of the oil and gas produced.  Overriding royalty interests expire at the end of lease from which they are created. Like royalty interests, however, these interests are only revenue bearing.

Oil & Gas Lease

An oil and gas lease is similar to leasing a commercial property. The Lessee (company) enjoys the benefit of use of the property while the Lessor (mineral owner) enjoys bonus and royalty consideration. Upon execution of an oil and gas lease, 100% working interest is vested in the Lessee.

Bonus Consideration

When you lease your minerals, you are paid a lump sum of cash (usually offered per net mineral acre) to sign the lease over to the Lessee.

Oklahoma Minerals

Sections

Oklahoma is a Rectangular Survey System ("RSS") state, meaning land is separated into Sections (1-36), Townships (North/South), and Ranges (East/West). Each Township contains 36 Sections, each Section contains 640 gross acres - being 23,040 gross acres, more or less, per township. In the example provided below, the parcel of land in discussion would be described as:

Section 14, Township 02 South, Range 03 West, Carter County, OK, containing 640.00 gross acres, more or less.

rectangular-survey-system.jpg

Tracts

Each section is then further severed into Tracts, which begin in the northeast corner and work counterclockwise. In the example provided, Tract 1 would be the Northeast Quarter (NE/4), containing 160.00 gross acres; Tract 2 would be the East Half of the Southeast Quarter (E/2 SE/4), containing 80.00 gross acres; and so on.

Net Revenue Interest ("NRI")

For wells drilled with < 5,000 feet of lateral length, assuming you own 10 net acres subject to a 3/16 royalty, the calculation would follow:

Net Acres (10) / Unit Acres (640) x Royalty (.1875)= NRI (0.00292969)

Oklahoma is unique in how it treats 1,280 acre (or larger) Drilling & Spacing Units ("DSUs"), however. Oklahoma requires the operator to space and pool each 640 acre section separately, then form the DSU through a multi-unit application with the Oklahoma Corporation Commission ("OCC"). Upon creation each Spaced Unit (or Pooled Unit) will be prescribed an Allocation Factor based upon expected perforations located in each Spaced (or Pooled) Unit.

Assuming you owned 10 net acres subject to a 3/16 royalty and the Allocation Factor was 50% (a two-mile horizontally drilled well), the calculation would follow:

Net Acres (10) / Unit Acres (640) x Royalty (.1875) x Allocation Factor (50%) = NRI (0.00146484)