Oil Royalty Terminology


Abandoned Well

A well that is not in use because it has either ceased to produce natural gas or because it was originally a dry hole.


Assignment Clause

A lease condition/term in which a lessee (individual or independent oil company sells (assigns) all or a part of a lease to another oil company. Thus the ultimate developer-producer may not necessarily be the original lessee.


Bonus Optional

A cash consideration paid to a landowner or mineral owner on the execution of an oil, gas and mineral lease. (Also referred to as a signing bonus.)


Cessation-of-Production Provisions

Lease extensions on both the primary and secondary terms of the lease that allow continuance of the lease in the event oil/gas are discovered, however production has ceased for any reason. There are stipulations – rules that must be followed if lessee exercises this option.


Communitization Agreement

A method of handling oil/gas production allocation in situations where state spacing orders or rulings (set by state oil/gas commissions) have created unintended barriers to access of an oil/gas reserve. This typically occurs when there are regulatory limits (usually due to ecological impact) set on well numbers per spacing unit (See definition Spacing Unit) and there are mixed leases (for example, state owned and fee) which cannot be independently developed. See definition Unitization Agreement.


Completion of a Well

The date that the well is properly equipped for production of oil or gas.


Delay Rental

A pre-agreed sum of money to be paid to the lessor (mineral owner) if drilling operations are not conducted within one year after the lease is signed. The delay rental fee is paid on each subsequent anniversary date of the primary lease or can be paid lump sum in advance (at lease commencement). (See definition Paid-Up Lease.) In some cases failure to receive this delay rental fee can result in termination of the lease.


Division Order

A distribution or schedule of owners and their decimal share (in fractions carried to the seventh digit) in the proceeds or revenues of the oil/gas well, drilling unit or spacing unit. Owners can expect to receive their first check within 6 months of signing a division order. In most states a division order is prohibited from altering or amending the original terms of the lease.


Dry Hole

An exploratory or development well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well.


Dry Hole Provisions

Extensions on both the primary and secondary terms of the lease that allow continuance of the lease in the event of a dry hole. These provisions allow for drilling or reworking operations (continued in good faith) to continue under the original lease.


E&P

Oil and gas industry acronym for firms engaged in “Exploration and Production”.


Fee Estate

An estate wherein land and minerals are owned together.


Held By Production

A well is designated as Held By Production (HBP) when it is capable of continued commercial production beyond the primary term stipulated in the lease. When incorporated as a provision in an oil/gas/mineral lease, HBP perpetuates a company’s right to operate a property or concession as long as the property or concession produces a minimum paying quantity of oil or gas.


Holding Broadly

As defined it is an ownership position or interest in an oil/gas/mineral resource.


Joint Tenant Deed

A deed that transfers undivided co-ownership to two or more people whereby, upon the death of the first owner, his share automatically transfers in equal shares to the remaining owner(s).


Landman

The individual who negotiates/secures oil and gas leases with mineral owners, manages an oil company’s relationship with its landowners and partners, cures title defects and negotiates with other companies on agreements concerning the lease.


Landowner

The person who generally owns all or part of the minerals under his lands and is entitled to lease the same. (See Mineral Owner and Surface Owner for definitions of other types of ownership.)


Land Tract

A unit of land also known as a parcel of land. In the Pops product this includes subdivision lots.


Lease

The agreement that assigns rights to explore for oil, gas or other minerals and to produce/extract them from the ground. This legally binding contract outlines the basic terms such as royalty to be paid (royalty clause), term (length of time), description of the land(s)/parcel(s) involved, how market price or value of extracted resources are to be calculated, pooling agreements (if applicable), compensation and remediation measures for surface damage to land(s)/parcel(s), and operating provisions such as, shut-in provisions, dry-hole provisions and cessation-of-production provisions, etc. There is no standard or universal lease.


Lessee

Term designating the receiver of rights in a lease. This may be an exploration and/or production company, or a broker, such as a landman, who intends to sell a package of leases to an exploration company.


Lessor

Term designating the mineral owner in a lease. The mineral owner, as Lessor, grants rights to the lessee.


Life Estate Deed

A deed that transfers to the grantee the right to receive revenues generated from oil and gas production and lease bonuses as long as the grantee is alive. Once the grantee dies, the right to receive revenues reverts back to the grantor. Commonly used when an owner wants to transfer his oil assets out of his estate but wants to continue to receive the revenues generated from the oil royalties during his lifetime.


Market Price

An agreed upon formula for determining the market price or value of the product produced and thus the royalty payment. This formula can be integrated into the lease.


Mineral Deed

A deed that transfers ownership of the royalty interest including the right to execute leases and receive bonus payments.


Mineral Owner

Generally one who owns only minerals under a tract/parcel of land (but no surface) along with the right to execute a lease on the same.


Mineral Rights

The right to explore and produce the resources in the land. Mineral rights may be separate from surface rights and water rights, which are called “severed mineral rights”.


Net Revenue Interest

The proportion of oil and gas revenue that each person is entitled to or the ratio of the net acres owned to the total acres in the drilling or spacing unit.


Operating Agreement

A legally binding agreement among interest holders stipulating how a well is to be operated.


Operating Well

Any well that is not plugged and abandoned. Synonymous with the term producing well.


Operator

The party designated in the operating agreement, permit application or well registration to conduct the operations of the well. Any person who locates, drills, operates, alters or plugs any well or reconditions any well with the purpose of production. Synonymous with the term well operator and/or designated agent.


Overriding Royalty

A royalty interest in an oil/gas lease that provides no control over the operations of the lease, only revenue from lease production.


Owner

Usually any person who owns, manages, leases, controls or possesses any well or coal property. This group can be further subdivided into type of owner e.g. landowner, surface owner, mineral owner and working interest owner. (See respective definitions.)


Owner Number

A unique alphanumeric designation assigned to each owner of a (n) oil/gas/mineral interest. Owner numbers may change through the life of a division order.


Payments

At least four potential payments may be made to the mineral owner via the oil and gas lease: (1) bonus payments (See definition Bonus Payment.), (2) delay rentals and shut-in royalties (See respective definitions.), (3) surface damages and (4) production royalties. (See definition Royalty Payment.)


Paid Up Lease

A lease in which all delay rentals are paid in advance at the commencement of the lease. (See definition of Delay Rental.)


Plat

A map, drawing or print accurately drawn to scale showing the proposed or existing location of a well(s).


Pooling Agreement

An agreement (voluntary or compulsory) whereby the owners of oil and gas rights agree to join their small tracts or fractional mineral interests for the drilling of a single well in a single spacing unit. In most states (but not all) pooling becomes official (perfected) when the lessee files a “Declaration of Pooling” in the courthouse. Leases may include pooling clauses (permission to pool) allowing the lessee to negotiate pooling units without the need for additional owner or lessor approval.


Pooling order

A court issued pooling brought about in the event a voluntary attempt at pooling is unsuccessful. This order is also referred to under many names as involuntary, compulsory, statutory or forced pooling.


Proceeds

A method for determining royalty payment based upon the actual revenue derived from the

sale of the mineral.


Producing Well

Any well not plugged and abandoned. Synonymous with the term operating well.


Quit Claim Deed

A deed that transfers any mineral, royalty or overriding royalty owned with no warranty of title. Also known as quitclaim deed, quick claim deed or quick claim deed.


Reservoir

A geologic rock formation in which oil and/or gas has pooled, that is accumulated. The rock lining reservoirs is usually porous in nature, for example, sandstone and/or limestone.


Royalty Payment

Revenue collected by mineral owner which is typically set “at the well” or “at the well head”, that is free of production costs. (Note: If the lease fixes the royalty “in the pipeline,” “at the place of sale” or at other delivery points, different costs subsequent to production may be shared, thereby impacting the final royalty payment.) Royalty payment can be calculated based on agreed upon market price formula (See definition Market Price.) or based on proceeds (See definition Proceeds.)


Royalty Deed

A deed that transfers ownership of the royalty interest only and not the right to execute leases and receive bonus payments.


Severed Mineral Rights

A landowner who owns both the surface and subsurface mineral rights, sells or grants by deed the mineral rights underlying their property. Thus we say these rights have been severed or separated from the surface ownership.


Shut-In Fees

Payments to royalty owners as compensation for loss of income because the lessee has chosen to defer production from a well or property capable of producing gas or minerals in paying quantities, but is shut-in. (See definition Shut-In Well.) Depending on lease these shut-in fees can be paid monthly or annually.


Shut-In Royalty

An annual payment made to the royalty owner whose well has been deemed/classified as shut-in. The sum of the payment approximates the amount of the delay rental payment. Payments begin after the expiration of the primary term of the lease.


Shut-In Well

An oil or gas well that is shown to be capable of production in paying quantities, however is not presently being operated i.e. it is closed off or shut so that it does not produce a fluid product of any kind. A well may be shut-in for lack of a market, marketing facilities, and transportation facilities or for other reasons. A shut-in well is classified as a producing well and as such the lease will not terminate. Lease will often include shut-in provisions including payment of a shut-in royalty in order to continue the lease. (See definition of Shut-In Royalty.)


Spacing Agreement

A legally binding agreement among interest holders stipulating the area of land a producing well is to draw from.


Spacing Order

The legal filing of a spacing unit (required in some states where deviations in a spacing unit are proposed). In most states no spacing order is required when an applicant for a well permit proposes a unit, which conforms to state law for unit sizes and setbacks. In those states issuance of the permit by default establishes the unit.


Spacing Unit

The area of land (acreage) around a well that is entitled to receive a share of the well’s production. It includes an identification of the location and number of wells that can be drilled in order to drain a reservoir. The size of a spacing unit can very from 10 acres to 640 acres dependent on the reservoir being tapped, nature of the geologic structure and whether the resource is oil or gas. Synonymous with the term drilling unit or production unit.


Spud In

The first boring of a hole in the drilling of a well by any type of rig.


Surface Damages

Payment made to lessee typically at the end production (that is, towards end of the duration of a lease), although it may be prudent to negotiate collection at commencement of drilling (that is, at the beginning of a lease) when the well is plugged and abandoned or when a dry hole is drilled. The amount of the payment generally parallels the fair market value of the land used for the drill site. Lease clause may also prohibit assignment of the lease unless surface damages are first paid.


Surface Owner

Usually a landowner who owns no minerals under his land.


Term of Lease

The amount of time a company has to drill a well and establish “commercial production” or “production of oil or gas in paying quantities”. Oil/gas leases have terms typically ranging from 3-5 years. Oil/gas leases are generally divided into two time periods. The first period (primary term) is a set number of years negotiated by the parties during which drilling operations must begin or delay rentals must be paid. The second period (secondary term) begins when production has been established, and continues so long as there is commercially viable production. (See definition of Held by Production.)


Title (Abstract of Title)

A chronological and condensed history of the ownership or significant events affecting a particular piece of property. In formal usage, a document, prepared and certified as complete and accurate by an abstract or title company, which contain all pertinent information (summary of original grant, conveyances, encumbrances affecting the property) or copies of all documents affecting title to a given piece of property.


Unitization Agreement

An agreement between one or more working interest owners and one or more royalty owners to consolidate, merge, integrate or otherwise combine their producing leases (rights or interests in a field or pool) into one large “lease unit” for the benefit of maximizing production. Unitization allows reservoir engineers to plan production at the most efficient locations and rates. For example, by joining into one unit, multiple wells can be employed to work together to access oil reserves that might otherwise be unrecoverable or perhaps a minimum acreage of land must be achieved in order to obtain a drilling permit. Unitization is not typically undertaken unless conventional methods of oil/gas recovery have been exhausted. In the end everyone in the unitized field will share in the production based on their acreage contribution to the unit.


Well

A hole drilled for the purpose of producing oil or gas or both.


Well Operator

The party designated in the operating agreement, permit application or well registration to conduct the operations of the well. Any person who locates, drills, operates, alters or plugs any well or reconditions any well with the purpose of production. Synonymous with the term operator.


Well Site

The area that is directly disturbed during the drilling and subsequent use of, or affected by production facilities directly associated with any oil well, gas well or injection well.


Wildcat Well

An oil or gas producing well that is drilled and completed in a pool in which a producing well has not been previously completed.


Working Interest Owner

The owner of an interest in oil or gas burdened with a share of the expenses for developing and operating the property.


Workover

Any operation designed to sustain, to restore, or to increase the production rate, the ultimate recovery, or the reservoir pressure system of a well or group of wells and does not include operations that are conducted principally as routine maintenance or the replacement of worn or damaged equipment.