How Does Oil & Natural Gas Development Work?

Posted January 31, 2021

If you’re thinking about leasing your mineral rights—or even if you’ve already taken that step—you might be wondering what happens after you sign the contract. How do your minerals in the ground turn into royalties in your pocket?
Here’s a high-level overview of how operators move from permits to production:

1. Pooling properties
Unless you own a huge piece of land, there’s a good chance your property will be placed into a pooled unit. Most leases today include a clause that says your property can be pooled together with other properties in the area so the operator can drill horizontal wells to extract minerals from them at the same time (rather than setting up separate wells to remove minerals from each property individually). This practice is common and much more efficient for operators. Landowners in a pooled unit divide royalties based on the percentage of total acres each property makes up.

2. Acquiring permits
All wells have to be permitted before any minerals can be extracted. Operators apply for permits with the Ohio Department of Natural Resources (ODNR) and have to wait to receive approval before putting any rigs to work. A permit form generally provides the ODNR basic information—such as what company will be drilling, what type of well they will be drilling, and a list of mineral owners. Permits expire if drilling has not started on the drilling location within 2 years from the date the permit was originally granted by the ODNR.

3. Prepping the pad
During the permit process, the company will also be working on constructing the pad where the rig will drill. A “pad” is a temporary work site that is set up on a piece of land on or around the land where the minerals are being extracted. In most cases, the pad is ready to go by the time the rig arrives. Once the permit is approved, the operator typically gets a rig on location pretty quick—especially if it’s on their development plan.

4. Making a Declaration
Before they start drilling a well there’s also going to be a “declaration of a pooled unit” or a DPU. This is a document that is filed with the county that shows every oil and gas lease that’s going to be in that specific unit. The purpose of this declaration is to show the boundaries of the unit, what parcels are included, and who, in essence, is set to profit from that well or wells. Like permits, these are recorded documents kept on file with the county.

5. Starting to “spud”
After the permit is issued and all the equipment is set up on the drill site, the operator will determine where they want to drill and they’ll spud the well. While it’s probably not a term you hear thrown around at most backyard barbecues, “spud” or “spudding” is something oil and gas operators use to refer to the process of starting to drill a well. It’s not a made-up word either, it’s in the dictionary—a spud is a tool or device having the characteristics of a spade and a chisel.

6. Hitting the Market
Once the operator completes the well, it can begin producing oil or gas (that is, if and when the operator makes the decision to bring it online). The oil and gas are extracted from the land and moved to a refinery where they are prepared for the market. From that point, the company starts marketing and selling the product. Once that happens, you and every single mineral owner in that unit (assuming they still own their mineral interests and there’s no title issues) are going to receive a division order from the operator who drilled those wells.

7. Delivering Royalties
After you sign and return the division order, you’ll begin receiving royalties. In most cases, you’ll receive your first royalty check the following month.

How quickly (or slowly) this process moves varies by operator

That’s typically the whole process. While that recap might make it sound like everything happens very fast, it doesn’t always happen that way. Depending on the operator, it could take anywhere from 10 months to 2 years from the date the permit shows up to when you receive your first royalty check. A lot of it depends on how quickly the operator gets the well online and producing after they receive the permit. And, as with all things oil and gas, it also helps to have a little bit of luck.

Wondering when you’ll receive royalties for leasing your mineral rights? Have a conversation with the team at Gateway Royalty today. We’ll help you assess your situation and answer your questions.

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