Net Mineral Acre (NMA) vs. Net Royalty Acre (NRA)

In oil and gas leases, there are two commonly confused designations for measuring different things. Both net mineral acres, and net royalty acres are important parts of an oil and gas lease. If you are thinking about leasing your mineral rights, knowing the definition and difference between these two terms is important in fully understanding your contract.

What is a Net Mineral Acre?

A net mineral acre (abbreviated NMA) is a term used to describe a person’s percentage ownership of a larger parcel of land. It is best illustrated with an example.

Let’s say you own ¼ mineral share of a 100-acre property. This means that you own 25 net mineral acres. If you owned the entire property, your net mineral acres would be equal to the gross mineral acres, at 100. However, most mineral leases are divided among several mineral rights owners.

What is a Net Royalty Acre?

A net royalty acre (NRA) is a measurement of the cashflow that you receive from the sale of oil and gas on a per acre basis. In many oil and gas leases, a royalty percentage of about ⅛ (12.5%) was originally common for mineral rights owners, however, this has changed over time.

To calculate your NRA, first find your royalty rate and divide it by ⅛ (0.125). Let’s say that your royalty rate is 10% of the share of oil and gas sales. Here, 0.1 divided by 0.125 is equal to 0.8. From there, multiply that number by your NMA to get your total NRA. In the example above an NMA of 25 multiplied by 0.8 would equal an NRA of 20.

The Difference Between A Net Mineral and Net Royalty Acre

Net mineral and net royalty acres define different terms. Net mineral acres define an interest in land, but cannot be equated to dollars and cents. Net royalty acres are much more commonly used in mineral lease transactions because they can fully illustrate the royalty potential of a plot of land.

Image Credit: BLM Wyoming

mineral interests

The Different Kinds of Mineral Interests

It’s no secret: oil and gas royalties are a great way to generate financial income if you own mineral rights. Whenever an oil and gas lease is signed and operations begin, mineral rights owners can gain mineral interests as a portion of the sale of resources extracted from their property.

Depending on the contract (and relationship to the operation), mineral interests are generally distributed in one of three ways. These include:

● Royalty Interests (RI)

● Overriding Royalty Interests (OR)

● & Working Interests (WI)

Royalty Interests (RI)

Royalty interests are the most simple and common form of mineral interest payments for mineral rights owners. In this sense, they are also commonly known as lessor’s royalties for landowner’s royalties. Generally speaking the amount of a royalty interest payment is based on a fixed percentage outlined in the mineral rights lease as a portion of the proceeds from the sale of resources.

Overriding Royalty Interests (OR)

Overriding royalty interests, also known simply as overrides, do not affect mineral rights owners. Although they may be seen in the supporting documents for a royalty interest payment, overriding royalty interests are generally reserved for landmen, surveyors, or other individuals and entities that aid in the production of oil but do not own the land. You can read more here.

Working Interests (WI)

Lastly, working interests are another kind of interest payment that is specifically designated for people and entities that help produce and sell oil or gas. Working interests are also known as operating interests or leasehold interests and typically are reflective of the labor and equipment required to drill and extract resources from the land.

It is rare that mineral rights owners will receive any working interests, however there is no standard oil or gas contract. In some instances, a mineral rights owner’s ties with oil and gas operations or existing oil wells may lead to the acculturation of working interests atop a steady stream of monthly royalty interest in a mineral rights lease.

What is a Division Order for Mineral Rights?

If you are thinking about signing an oil and gas lease, then you may hear about and wonder what is a division order. For the first time mineral rights owners, nearly any legal document can be intimidating, especially if you believe that the oil and gas company does not have your best interests in mind.

The truth is, however, that division orders are a necessary part of determining the amount of money you can receive from oil and gas royalty payments. Below, we will break down everything you need to know about division orders in mineral rights leases.

Division Order Definition

A division order, also known as a division of interest, is a written agreement that outlines how the financial proceeds of an oil and gas operation are distributed. Division orders typically provide individuals with a defined, monthly, fixed percentage on a company’s exploration and sale of crude oil or natural gas.

Why are Division Orders used for Mineral Rights?

Division orders are necessary in order to define and enforce what a mineral rights owner is entitled to in a mineral lease. Within the division order, fixed percentages of oil and gas profits are defined between the mineral rights owner and the oil and gas company.

In many cases, there are multiple mineral rights owners on large oil wells that stretch across many property lines. In these instances, division orders are even more necessary, as they fully outline the exact percentage interests each property owner should be paid.

What is in a Division Order for Mineral Rights?

Every mineral rights contract and division order is a bit different. However, there are a few things that must be in every division order agreement in order to make it officially and legally binding. The agreed terms include:

● Lease terms, such as length and special details

● Royalty rates (fixed percentages)

● Bonus payments (typically upfront)

● Clauses in the event of a delay or abandonment of lease

Ultimately, even in the simplest terms, division orders should also be reviewed by a mineral rights professional before they are signed. It is important to have a qualified person to review your division order in order to negotiate the best rates and payments to lease your mineral rights.

Paid-Up Oil and Gas Lease – What Are They & Why are They Used

When it comes to negotiating a mineral rights lease, there are a lot of industry terms and lingo that require a full understanding before any contract agreement should be signed. One of the most common phrases questioned during oil and gas lease negotiations is the term “paid-up.” In this article, we will define paid-up oil and gas lease, in addition to exploring why and how they are created.

What is a Paid-Up Oil and Gas Lease Agreement?

A paid-up oil and gas lease is an agreement between a mineral rights owner and an oil and gas company, in which one payment is made at the beginning of the contract. This is the only amount of money that the gas company will pay the mineral rights owner until drilling operations begin. From there, the mineral rights owner may receive oil and gas royalties from the sale of resources extracted from their land.

Why Do Oil and Gas Companies Use Paid Up Leases?

Oil and gas companies will typically enter paid-up oil and gas lease agreements as an incentive to entice landowners to enter into a contract. If you receive an unsolicited offer with an attractive upfront payment promised, it is important to be wary of deals that seem “too good to be true.”

However, paid-up leases are extremely popular as the upfront payment is seen as a sort of “signing bonus” for entering the agreement. Occasionally, oil and gas companies will sign lease agreements that expire before they even explore their acquired land. With a paid-up lease, mineral rights owners are guaranteed at least some money in exchange for their property’s value.

Conclusion

Ultimately, if you’re wondering whether or not to sign a paid-up lease agreement for your mineral rights, you must weigh your options. If the lease agreement looks good, you may be able to receive a small sum of cash and a future of plausible oil and gas royalty payments. However, if you are primarily interested in an upfront payment, you may want to consider selling your mineral rights outright. Compared to paid-up oil and gas leases, selling mineral rights is a much quicker way to generate larger capital gains.

An Oil Company Wants to Lease My Land, What Should I Do?

Leasing your land to an oil and gas company can earn you large amounts of money for the sale of resources owned within your mineral rights. So much so, that many people seek out oil and gas companies in the hope that their mineral rights may be valuable in some way.

Of course, entering into a contract with a landman can be extremely complicated and intimidating with some wondering if it is all worth the hassle. Below, we will outline your options after being approached by an oil company to lease your land.

Option 1: Lease Your Mineral Rights

Obviously, your first choice here is to sign the agreement. The oil company may have promised a large amount of money if you sign immediately, and that may just be too hard to pass up. Of course, mineral rights leases are highly negotiable, which means that you do not have to hastily agree before fully analyzing the contract terms.
If you’re approached by an oil company out of the blue, it is a good rule of thumb not to sign the first thing they give you. Instead, seek a lawyer or mineral rights expert to look over the agreement and set you up for success.

Option 2: Do Not Lease Your Mineral Rights

If you don’t like the idea of having an oil drilling operation on your land, then simply don’t sign the contract. In mineral-rich states like Texas, Pennsylvania, and Colorado, some companies may try everything they can to get you to sign the dotted line, however as the mineral rights owner, you can ultimately decide the fate of your land.

Option 3: Sell Your Mineral Rights

If you do not want to lease your mineral rights, but still want to profit from your property’s valuable resources, then you may want to consider selling outright. You can either sell your entire estate (surface and subsurface rights) or simply sell your mineral rights. If the oil and gas company wants to lease your land, that means someone out there would be interested in purchasing it. That way, you can earn a more immediate lump sum.

Oil and Gas Lease Form 88

In a world where there is no true “standard” oil and gas lease, Form 88 is about as close as it gets. Throughout the infancy and adolescence of the United States oil and gas industry, oil and gas lease Form 88 was considered the “standard form”. In this article, we will discuss what makes up Form 88 and how it is used today.

What is Oil and Gas Lease Form 88?

Form 88, is also known as the “Printed Form,” as it is the most commonly signed portion of an oil and gas lease. In full, Form 88 is properly called, “Standard Producers 88 Oil, Gas, and Mineral Lease,” or simply, the “Producer’s 88.”

The Producer’s 88 is the most widely used form for American oil and gas lease agreements, however, this does not mean that it is the best for individual oil and gas leases.

Oil and Gas Lease, Producers 88 Printed Form Resources

If you would like to see a sample of what a standard Producers 88 form looks like, there are many resources available online. The form was meant to be easily copied while only substituting information for drilling locations, involved parties, and specific lease terms.

Although there are many variations of the document floating around, here is one resource to quickly see a standard form.

Should You Use a Standard Form 88?

Today, oil and gas leases have never been more complicated. To tell the truth, it is very rare that the “standard” Producers 88 form is every used as-is. The Standard Producers 88 grants essentially full access to a property’s surface rights for the oil company to improve for the extraction, which may not sit well with some people. Additionally, new technologies in drilling have led to complicated land issues, making some of the 88’s language to be a bit obsolete.

Ultimately, if an oil or gas company asks you to sign a “standard” form, it is very important you give it a second glance before singing something potentially detrimental.

Oil and Gas Royalties: What You Earn with a Mineral Lease

For some people, oil and gas royalties are second nature, with producing properties generating wealth for years to come. For others, oil royalties and mineral leases are both foreign terms.

If you own your mineral rights, then you can potentially earn a significant amount of oil and gas royalties by entering into a mineral lease. In this article, we are going to lay out some of the most basic information about oil and gas royalties to help you understand how a mineral lease works.

What is a Mineral Lease?

A mineral lease, also known as an oil and gas lease, is an agreement between a landowner and an oil and gas company. For many larger operations, this agreement can be expanded between multiple property owners.

In a mineral lease agreement, the mineral rights owner still retains possession of the mineral rights while they are leased to the oil or gas company. However, for the duration of the contract, the oil and gas company essentially rents the property’s subsurface in order to explore and extract minerals.

What are Oil and Gas Royalties

Once your mineral lease is up and running and the oil company is able to extract resources, then you can begin to earn oil and gas royalties. Oil or gas royalties are a monthly payment to operation stakeholders as a percentage share from the sale of the extracted resources.

Here’s an example to help fully illustrate how an oil and gas royalties work. Let’s say your mineral lease entitles you to 5% of the profits from oil sales extracted from your property. In March, the company is able to drill and sell $50,000 worth of crude oil. Here, you would earn $2,500 in oil royalties.

Conclusion

In the United States, one of the best ways to earn an income from your land is by entering into a mineral lease agreement. As you can see from the information provided above, successful oil and gas drilling operations can lead to significant oil and gas royalty earnings for mineral rights holders.

Fee Simple Defeasible vs. Fee Simple Absolute: What’s the Difference?

Property deeds can be extremely complicated. When you are purchasing a new asset, however, it is extremely critical to fully understand what exactly it is that you are burying.

In property transactions, fee simple defeasible and fee simple absolute are two of the most common acquisitions. In this article, we will define these terms before helping you understand the difference between the two and what they mean for mineral rights.

What is a Fee Simple Absolute?

As you may be able to infer from the name, a fee simple absolute is the absolute highest form of property ownership that one can have. In a fee simple absolute, a person owns a property until he or she transfers it to someone else (through sale, gift, or inheritance). Here, property owners own surface rights as well as mineral rights, without any limiting conditions.

What is a Fee Simple Defeasible?

On the other hand, a fee simple defeasible is a type of property ownership in which the assets can be taken away from the owner after the occurrence (or-non occurrence) of a special event. Fee simple defeasible can be broken down into two very similar categories: “fee simple determinable” and “fee simple subject to condition subsequent.”
In order to paint a better picture, here’s a good example of a fee simple defeasible: I sell you my property in a fee simple defeasible with the condition that you create an oil well on the land in the next five years. If you fail to set up the oil well in the predetermined time period, then the ownership will revert back to me.

Fee Simple Defeasible vs. Fee Simple Absolute

As you can see, the difference between a fee simple defeasible and a fee simple absolute is quite easy to see. If the previous seller retains any conditional interest in the property, then the deed is most likely to be a fee simple defeasible. For most people, however, a fee simple absolute is the easiest and most common type of property ownership. Here, all deals are final and the new owner is free to do as they wish with the property.

Retaining, Leasing, or Selling Inherited Mineral Rights

When someone passes away, mineral rights are often included as an asset of said person’s estate. If you inherit mineral rights, you may not be sure what to do next. In this article, we will outline a few options for what to do with your newly bequeathed mineral rights and if you should retain, lease, or sell inherited mineral rights.

Step 1: Fully Transfer the Rights

If you are the rightful heir to a recently deceased person’s mineral rights, then you will have to transfer the ownership into your name. Here, you can contact a title or insurance company to conduct the search for the proper paperwork.

In some cases, in which you inherit both the surface and subsurface rights of a property, you may sign a new fee simple estate. Otherwise, your name will be added to the mineral deed.

Step 2: Identify any Existing Contracts

Let’s say you inherited active mineral rights that are currently leased to an oil and gas company. In order for you to receive any oil and gas royalties owned by the deceased, the will executor can contact the lessee in order to put your name on future checks. Once the lease expires, it will be up to you whether or not to renew the terms.

Step 3: Retain, Lease, or Sell Inherited Mineral Rights

Once everything is in your name, then you are free to do as you wish with your inherited mineral rights. In some parts of the country, your mineral rights may not be worth very much money. However, there are also plenty of regions in the US in which mineral rights can be very valuable if your land may contain oil, natural gas, or another precious resource.

Here, you can weigh your options and decide what to do with your new asset. Retaining mineral rights may be your only option for undesirable land, or else entering into a contract agreement may lead to great financial compensation. In a mineral rights lease, you can earn royalties from any resource extracted and sold from your property. If you choose to sell your mineral rights outright, you can potentially pocket a large lump sum of cash to help with retirement or the acquisition of another property.

How to Transfer Inherited Mineral Rights

In times of mourning, it can be difficult to handle a recently deceased person’s estate. This is especially true if there are some ungrateful opportunists looking to cash in on newly abandoned assets. How to transfer inherited mineral rights? It may sound like a difficult question, but there are a few easy steps you can take to make the process go as smoothly as possible.

1. Verify the Will of the Deceased

Above all, if someone leaves a will, this becomes a legally binding document. The will goes through a validity check known as the “probate process.” Once the legitimacy is verified, then the mineral rights can go to the rightful heir.

2. Identify the Rightful Heir

Sometimes, this step is quite easy. For those that have a handle on their portfolio and legacy, a will may include an obvious designation of mineral rights ownership. If this is not so clear, it is important to keep in mind that mineral rights are property, just like a home or a car.

If the deceased wishes to transfer all of their property to another individual, then mineral rights would be included in that bundle. Similarly, if a property (house, yard, etc.) is passed down as a fee simple estate, then the new property owner receives the mineral rights.

3. Get the Paperwork Done

In order to fully transfer mineral rights ownership, you must find and update any and all existing contracts and deeds. This means taking your paperwork to the applicable county office and signing the rights over to your name.

If you’ve just inherited some active mineral rights, that means that there are currently oil and gas operations on your new property. For this reason, you will want to get in touch with the lessee in order to update them on your inheritance. Before adjusting the contract, it is highly advised to contact a professional to make sure your legacy is not taken advantage of.