"A free royalty lease" - also called a non-participating royalty interest - covers land in which the State sold the land and reserved a free royalty interest in the minerals. The free royalty interest is treated the same as a non-participating royalty interest. The mineral owner executes the lease and the State only participates if there is production .
The Permanent School Fund gains revenue from a portion of the production, depending on the particular free royalty reservation, which is usually 1/16 or 1/8 free royalty interest."
This definition I found on the State GLO Web site.
This is similar in appearance to the 'mineral classified' or "Relinquishment Act" lease in which the State is a 50/50 revenue partner with the surface owner. Here, however, there may be a number of mineral rights owners but when production commences the State gets 1/16 to 1/8 of the revenue.
Question: Who pays the State's revenue? Does it come pro rata from the mineral rights owner or owners only or is the producer also responsible for his share? If from the mineral rights owners ONLY (no producer participation) then the relatively small 1/16 or 1/8 portion is essentially factored UP by the revenue split. If the lease between mineral rights owner and producer specifies a 25% / 75% split of proceeds and the producer is NOT paying the State's royalty interest, the 1/16, for example, is effectively 4/16 taken out of the mineral right owner's share.
The mineral owner's royalty interest is subject to the free royalty interest reserved by the State (GLO). Therefore, the mineral owner's royalty interest is reduced and the operator is responsible for paying the State (GLO). If you own 100% of the minerals, lease for 1/4 royalty, then you would be proportionally reduced by the 1/8 royalty reserved to the State, leaving you with 1/8 of the royalty. If you own less than 100% of the minerals, your interest will still be reduced for its proportionate share of the free royalty reserved to the State.
To take a specific case and calculations which are being made:
Mineral owner has 50% minerals, deal with producer is 25%/75%, free royalty interest 1/16
In the absence of free royalty interest, the mineral owner net proceeds are just 50% x 25% = 0.125 or 12.5%
If the free royalty calculation assumes mineral owner pays the whole 1/16 then the net to the owner is 12.5% reduced by 50% x 1/16 = 1/32 or 0.03125 which is 0.125 - 0.03125 = 0.09375 = 9.37%
If the free royalty calculation is shared among all parties including producer then the 50% owners net is reduced by his fraction times his fraction of the revenue sharing:
50% x 1/16 x 25% = 1/128 or 0.007813 which is 0.125 - 0.007813 = 0.117188 = 11.7%
So the difference to the owner is substantial: 0.09375 vs 0.117188 which is 25% difference in return. Depending on production of the well, this difference can exceed one hundred thousand dollars per year.
Who is controlling authority deciding how this calculation is to be made?
(Note: sorry for all the decimal points and calculations but there is a lot of $ in these decimal points and knowing what is correct is IMPORTANT).
I’d like more information on this topic. What is the authority for the assumption that the free royalty interest comes from the mineral owners’ 25%, particularly when the lease agreement is silent on the free royalty interest? If anyone has any experience in this regard please contact me directly. Thank you.
Received priority mail from Commanche Trail Pipeline that a proposed pipeline might cross land owned in Section 37, Blk 55 PSL and it might be necessary to acquire easement rights. Anyone else been notified about this pipeline and what easement terms are recommended.
Sorry, this got posted on ring forum and could delete it.
Donny