Answers to Frequently Asked Questions About Oil & Gas Royalty Payments
Posted April 30, 2020
When most landowners lease the mineral rights to their property, it’s the first experience they have receiving royalties of any kind. So it only makes sense that they have a lot of questions. What are royalties? How long will I receive them? Can I transfer them to another individual?
As a company that purchases mineral rights and royalties, we hear these questions regularly. Because most individuals aren’t familiar with the process of collecting royalties until they start working with an exploration and production (E&P) company, it’s important for you to know what to expect when it comes to royalty payments—and how they might impact your income and assets moving forward.
In this post, we thought we’d share answers to a handful of questions we commonly hear from landowners about oil and gas royalties.
What are royalties?
Let’s start by answering the most-basic question: What exactly are royalties and how do they work? In a nutshell, royalties are payments made based on income received over a specific period of time.
If you are a landowner who leases the mineral rights to your property, the company that leases your minerals will typically agree to pay you a percentage of the profits they make from selling the minerals collected from your land. What that percentage ultimately is will vary depending on the company you’re working with and the region you’re in, but the industry standard is between 15-20%.
Landowners don’t start receiving royalties until production actually begins on your property (when the well is up and running) and the product has been taken to market and sold. Basically, the company has to make money before you can make money. Sometimes this can take months or even years, leaving many landowners who are excited to receive royalties stuck playing the waiting game.
But once production is up and running, and the oil or gas is being sold, you will start receiving royalty checks. These typically come in the mail monthly. How much you receive depends on the volume of minerals coming out of your property, the price of oil or gas at that given moment, and the royalty percentage you agreed to receive in your contract. All these things can impact the size of your royalty checks.
Can I transfer my royalty rights to another person?
Many people ask this question because they either (1) want to know if they can leave their mineral royalties to a family member in their will, or (2) they are thinking about selling their property. In both cases, the answer is “yes” royalty payments are transferable to another individual.
If you are planning to sell your property, you must notify the oil or gas company that is leasing your land and your realtor. Once they are both notified, they will arrange for your royalty payments to be transferred to a different landowner.
If you want to transfer your royalty payments in the event you should pass, you have to set that up in your will. If that were to happen, your kids, grandkids or whomever inherited the royalty would have to notify the operator. The operator won’t just make the change automatically—they inheritor needs to provide them with the will and probate, and then they will make the change.
If I buy a piece of property with an active mineral lease (that includes royalties), how do I get payments?
The answer to this question is similar to the answer to the question above. If the parcel of land is encumbered by an oil and gas lease, and you buy that property with the minerals and there’s no reservation of the oil and gas, then you would have to notify the operator of the change in ownership.
Once the deed is recorded in the courthouse showing you now hold the title to both the land and mineral rights for that property, you’d send the deed that to the company holding the lease. You would do that with the owner relations department for the specific operator. Again, they won’t just make that change of ownership for royalties automatically, it’s on you to do it.
This is the same process we go through when we purchase mineral rights or royalties from landowners. We take a deed once it’s been filed and notify the operator that the change in ownership has been made. We have to put the operator on notice that we now own title to the minerals that we acquired.
How long will I receive royalties?
Initially, it can take five months or longer before you receive your first royalty check from the first sale on your well. From that point on, royalty checks will generally continue to be issued and mailed by the end of each month—as long as the well is producing.
If your well stops producing or the company decides to stop production on your land for any reason (market prices, oversupply, financial troubles, etc.), you will stop receiving royalties. Once the lease has expired on your mineral rights and you’re no longer under contract, you will stop receiving royalties.
What is the typical life of a well?
This is a tough question to answer. What companies look at more than time is what’s called “reserve life”. A landowner thinks in terms of, how long is this well going to produce? Will it last for 30, 40, or 50 years? But, ultimately, that’s not what matters. What matters is maximizing the reserves under the ground in that formation for every well drilled. The operator is going to do its very best to produce the well as long as economically possible. Our best guess is that Utica Shale wells may have a 50 year reserve life based on current technology.
Are you an Ohio landowner who has additional questions about selling your mineral rights or receiving royalty payments? Drop us a line and we’ll do our best to answer them for you.