Below are a set of key terms and definitions which can be used to help explain many of the terms mineral owners should know or come across on a normal basis.
Ad Valorem Taxes
These are taxes on “producing” minerals only and are collected once a year at the county level. Mineral interests are considered real property and are taxed based on the appraised “fair market value”. Fair market value is the price a potential buyer would pay for the mineral interest at current market conditions.
Basin
An oil basin is a depression or low-lying area in the Earth’s crust formed by plate tectonics where sediments accumulate. Most basins contain some amount of shale and provide opportunities for shale gas exploration and production.
Commodity Prices
Crude oil and natural gas are energy commodities that trade on commodities markets. Commodities are natural resources that are traded on open markets daily. The current or expected oil and gas commodity price is an important factor in putting a value on mineral rights that you own.
Decline Curve
The production or amount of oil and gas produced from a well typically declines throughout the life of the well. A decline curve is a way to analyze the pace at which production is expected to decline and to forecast future performance of an oil and gas well. Decline curves are important tools in assessing the value of mineral rights.
Easement
An easement is a legal agreement granting permission by a surface owner or mineral owner to a company or individual for a stated purpose. In oil and gas this can include the right to search for and develop oil and gas, as well as installing roadways and pipelines.
Fee Simple Estate
A complete ownership of both the “surface rights” and “mineral rights”. The owner has control over the surface, subsurface and air above a property.
Fracking
Hydraulic fracturing, or fracking, is a technique designed to recover gas and oil from shale rock by drilling down into the earth and directing a high-pressure water mixture at the rock to release the gas inside.
GOR (Gas/Oil Ratio)
The gas/oil ratio (GOR) is the number of cubic feet of Natural Gas produced along with a barrel of oil.
Horizontal Drilling
Horizontal drilling is the developing technology that makes it possible to drill a well from the surface, vertically down to a certain level, then to turn at a right angle and continue drilling horizontally within a specified reservoir or an interval of a reservoir, which can result in both increased production rates and greater ultimate recoveries of hydrocarbons.
Independent Producer
An independent producer can be either:
A person or corporation that produces oil for the market who has no pipeline system or refining.
An oil entrepreneur who secures financial backing and drills his own wells.
Joint Operating Agreement (JOA)
A Joint Operating Agreement (JOA) is a detailed written agreement between the Working Interest Owners of a property which specifies the terms according to which that property will be developed.
Lease (Oil and Gas)
A lease is a contract by which the owner, of the mineral rights to a property (lessor), conveys to another party (lessee), the exclusive right to explore for and develop minerals on the property during a specified primary term and as long thereafter as oil, gas or other minerals are being produced in paying quantities.
Mineral Rights
Mineral rights are ownership rights to resources underground and are separated from ownership of the surface or surface rights. This includes natural resources such as coal, natural gas, oil or any other commodity that can be mined. Mineral rights owners receive royalties from anything produced from within them. The mineral interest includes an implied easement to use the surface in such ways and to such an extent as is reasonably necessary to obtain the minerals under the property.
Net Mineral Acres
Net mineral acres represent the net acreage owned by mineral owner, of the total gross acres in a given tract of land. For example, if you own one half of the minerals under a 100-acre tract of land, you are said to own 50 net mineral acres out of 100 gross mineral acres.
Overriding Royalty Interest (ORRI)
An Overriding Royalty Interest (ORRI) is a fractional, undivided interest with the right to participate or receive proceeds from the sale of oil and/or gas. An ORRI is NOT an interest in the minerals themselves. It is an interest in the proceeds or revenue from the oil & gas minerals sold. The interest is limited to a specific tract of land and is bound to the term’s limits of the existing lease. If a lease is allowed to expire, an ORRI is dissolved or expires with the lease.
Producing Well
A producing oil and gas well is a well that is actively being produced as a flowing or pumped well to extract oil and gas from below the surface, which is then sold to an oil and gas purchaser.
Quitclaim Deed
A quitclaim deed is a legal instrument that is used to transfer interest in real property. The entity transferring its interest is called the grantor, and when the quitclaim deed is properly completed and executed, it transfers any interest the grantor has in the property to a recipient, called the grantee. The owner/grantor terminates (“quits”) any right and claim to the property, thereby allowing the right or claim to transfer to the recipient/grantee. Unlike most other property deeds, a quitclaim deed contains no title covenant and thus offers the grantee no warranty as to the status of the property title. Because of this lack of warranty, quitclaim deeds are most often used to transfer property between family members, as gifts, placing personal property into a business entity (and vice versa) or in other special or unique circumstances.
Royalty
A Royalty - is a share of production, free of the costs of production, when and if there is oil and gas production on the property. Oil and gas royalties are usually expressed as fractions, (1/8 of production). There are several different types of royalty interests that exist.
Landowner’s Royalty or Lessor’s Royalty - is the mineral interest owner’s compensation under the lease for production
Overriding Royalty - is a royalty interest carved out of the of the lessee’s leasehold interest. Since an overriding royalty interest is created from an oil and gas lease, it ends when the lease from which it is carved terminates.
Nonparticipating Royalty Interest - is a royalty carved out of the mineral estate, entitling its holder to a stated share of production, but without the ability to execute an oil and gas lease or receive bonus payment.
Term Royalty interest - is a royalty for a stated term, which may be fixed (e.g., for 25 years) or defeasible (e.g., for 25 years or as long as there is production from the premises).
Surface Rights
Surface rights is ownership limited to the surface only of a parcel of land. In Texas, ownership in the “mineral estate” and “surface estate” can be severed. Owning surface rights does not necessarily mean you own the minerals.
Title Curative
Title curative is a set of procedures used to “cure” defects in chains of title, such as correcting instruments that are erroneous or ambiguous. The process is focused on whether the actual use and possession of the land under review is consistent with record title.
Unitization
Is the process of consolidating or merging an entire oil field or part of a field into a single unit. This allows an operator to maximize the amount of oil and gas extracted from a field or reservoir without the need to adhere to lease or property boundaries.
Verification of Title
Title verification is the process of researching who owns the land in question and determines the existing ownership interests in surface rights, mineral rights and oil and gas lease hold rights. This process will also determine if there are any legal restrictions, liens or levies on the subject property.
Working Interest
Ownership in an oil and gas lease where the WI owner is responsible for his proportionate share of the cost of leasing, drilling and producing oil and gas from a well or unit under said lease.
1031 Exchange
1031 exchange refers to the section in the IRS code that allows mineral owners to defer capital gains taxes on the sale of their mineral or royalty rights when exchanged for another qualifying property.
Zone
A zone is a specific interval of rock strata containing one or more reservoirs. Used interchangeably with “formation”.