How Do I Calculate My Royalty Interest within a Pooled Unit?
Posted July 29, 2019
If you are a landowner who has leased your mineral rights to an energy company in Ohio, you may be placed in a “pooled unit” or a “pooled production unit”. You may be wondering exactly what this means and how (if at all) it will affect your mineral royalties. Here is a quick primer on “pooling” and how to estimate your royalties if your land is part of a pooled unit.
What Does It Mean to Be Part of a “Pooled Unit”?
Most leases that energy companies sign with landowners today include a pooling clause. This clause enables the companies to combine (or “pool”) the minerals from your property with the minerals from surrounding properties as they are extracted from the ground.
For example, if an energy company has leased your mineral rights as well as the rights of five of your neighbors, they might pool them all together in one production unit. The company would then drill and complete wells in specific locations within the pooled production unit.
Sometimes the reason for creating a pooled production unit is that a certain amount of acreage is needed for a drilling permit. If a single property does not meet the acreage requirement, energy companies will often combine multiple properties until they have enough acreage to get a permit. In other cases, cost and efficiency factors might also come into play.
In natural gas shale basins like the Utica Shale play in Ohio, the drilling of unconventional, horizontal gas wells is another reason why “pooled units” are created today. Unlike vertical wells, which can only access reservoirs of gas directly below where drilling is taking place, horizontal wells are drilled laterally underground across multiple parcels of land. This type of drilling is becoming increasingly common, leading to more pooled units.
How Does Being Part of a Pooled Unit Impact Your Royalties?
Being part of a pooled unit essentially puts you on a team with the energy company and other landowners, whereby the oil and/or natural gas production are realized for the pooled unit as a whole.
You may be wondering about the role of your property in the pooled unit as it relates to the distribution of royalties. Essentially, it’s based on how big a role you play on the team (as determined by your acreage in comparison to the total acreage in the unit). If you have 100 acres and the total unit has 400 acres, you get credit for 25% of all the minerals the pooled unit produces.
If not for pooling, there is a high probability a single landowner’s acreage wouldn’t get drilled or developed, which could dramatically diminish its value.
How to Estimate Your Royalty Interest in a Pooled Unit
We talked about how pooled production units impact your royalties and for what share of the production you get credit. Now let’s look at how to calculate royalty interest when you are part of a pooled unit (fair warning: there is some math involved).
Using this simple formula, you can calculate your net royalty interest within a pooled unit:
Your net acres ÷ Total unit acres × Your royalty rate
= Your net royalty interest percentage
Here’s an example…
Let’s say you have 100 acres of minerals, which you lease for 12.5% royalty rate (which is standard throughout Eastern Ohio). Your acreage then gets pooled in a unit that has 400 acres total. The formula would look like this:
100 ÷ 400 × 12.5%
In this example, you have a net royalty interest of 3.125%. This means that you would receive 3.125% of all the proceeds from production in your pooled unit. A monetary example would look like this:
If your unit is producing at $50,000 a month,
you’d receive $1,562.50 a month in royalties.
$50,000 x 3.125%
As you can see, this can be both a little bit confusing and difficult to manage. That’s why an added benefit of selling a portion of your royalties to a trusted partner like Gateway Royalty is beneficial. Not only do you get cash up-front and immediately, but you also get insight from people who understand the oil and gas industry and will help you make sense of it all.
Receiving Up-front Payment for Your Royalty Interest
When it comes to your mineral rights, it’s always helpful to know what to expect. Many landowners don’t initially expect to be placed in a pooled unit, but it’s not uncommon. It’s just another aspect of the slow and often-confusing process that is oil and gas development and production.
For landowners awaiting royalties, it’s important to remember that there are other options available. At Gateway Royalty, we offer up-front payment for your royalty interest. Connect with us today to find out if selling your mineral rights is the right choice for you.