You have 1 acre in a section (640 acres) with a 1/4 royalty. 1 / 640 * 1/4 = 0.000390625 as your royalty interest. If the horizontal well crosses into another section your royalty will be pooled with the production from the other section as well as your own section. That will reduce your royalty to 0.000195313. If a well produces 2000 barrels of oil per month at $60 per barrel you will receive $46.88 @ 0.000390625 or $23.44 @ 0.000195313. Multiple horizontal wells will likely be drilled, multiple by the number of wells in production.
The up front money is in the bonus. Once in production you will only pay state taxes if you negotiate to not pay production costs.
Create a temporary email and contact me for an addendum.
Not surprising if landman spoke to you only, but not your four family member “partners”, probably hoping you will be the leader and persuade your family members to agreement, saves him/her a lot of repetitive explanations.
You might be interested in a satellite picture, enter your GPS coordinates into Google Earth Pro, GPS courtesy of PeteR message 27 above. I suspect you own minerals only, because the 1/3/19 photo shows row crops.
Ask landman if your title is clear and strong, if not, some legal expense may be necessary to file wills etc in Dimmit County to prove up your title chain. Hopefully your predecessors have probated wills.
You’ve probably never paid any ad valorem taxes because your minerals have perhaps never paid royalties. Mineral owners do not pay property taxes until royalty payments commence.
Excellent primers on lease and royalties, search Texas A&M Real Estate Center.
You may know this by now, but leases are usually only two pages, a standard form known as “Producers 88” developed maybe 70-90 years ago. Producers 88 provides advantages to operators (lessee) not mineral owners (lessor). Smart lessors insist on an addendum, which states that it supersedes & governs any terms in conflict, the addendum shifts the advantage to the lessor. Perhaps the most important addendum item IMO is royalties will not be reduced by post-production costs for oil and gas. Leases are recorded in land records, and you can find many with addendums (could share mine with you). Lease docs will never reveal the lease bonus because TX is a nondisclosure state.
There are many offset wells surrounding you, should be quick & easy to look at the oil & gas production by month.
Warranty . The lease says the lessor warrants and defends title to his property. A lot of times this is crossed out and you put in a special provision that says warranty has been deleted, because you are not warranting that you own these minerals.
I agree with Roy, up to you spending money on filing wills or doing title searches. The oil company did all this work to find you and establish your ownership – which may be wrong. You need a non-warranty sentence that keeps you from having to repay all or part of the bonus. Your royalty payments will be adjusted accordingly. By getting the landman to supply you with his inheritance flowsheet you will have the information they used to establish your ownership. In your retirement years you can go to all the county courthouses and follow the flow. (Many documents can be searched on-line).
I cannot thank you all enough for all this advise. My lease is 6 pages long?! And I’m still trying to understand it. I have accumulated a ton of questions for the landman for which I am calling back on Monday!!! Guess we will see what happens after that. I’m on vacation next week so hoping to be able to spend alot more time on this!!! And get something going. I just don’t want to make a huge mistake that I will regret later. Thank you all again!!!
Cash payments received by a landowner prior to drilling, commonly referred to as lease bonus payments, are considered ordinary income for tax reporting purposes and are subject to ordinary income taxes. The oil company reports bonus payments to royalty owners on IRS Form 1099 MISC, Box 1, Rents, and are reported on the recipient Taxpayer’s Schedule E. Bonus payments are not subject to self-employment tax.
■ Royalty payments. Royalty payments are reported in Box 2 of Form 1099 MISC. The payments are considered ordinary income and are reported on the recipient taxpayer’s Schedule E. Royalty payments can be reduced by allowable depletion and related expenses, if any, to arrive at taxable income to the recipient. Also, property taxes, severance taxes and other expenses are deductible from the amount of proceeds shown on Form 1099 MISC.
In Texas, a fee simple (an absolute interest in land over which the holder has complete freedom of disposition during his life) absolute ownership of the entirety of a parcel of land includes both a surface and mineral estate
The mineral estate consists of five interests:
(1) The right to develop (the right of ingress and egress),
(2) The right to lease (the executive right),
(3) The right to receive bonus payments,
(4) The right to receive delay rentals,
(5) The right to receive royalty payments.
These attributes, when taken together, are often referred to as a “bundle of sticks,” and it has been recognized that individual “sticks” can be sold while others are retained. In addition to being defined as one of the five rights of a mineral owner, the executive rights to lease have been defined by courts and treatises as the exclusive right to execute oil and gas leases.
Our lease is two parts, 2-page “Producers 88” template with eight standard clauses, plus 6-page addendum with good 12 clauses mostly to protect lessors. Suggest you read each clause, translate it to plain English.
Lessee (operator) will hold exclusive access to your minerals “held by production” as long as at least one well produces paying quantities. Lease expires in X-years if no production (“primary term”). “Continuous Development Clause” is confusing for laymen to interpret, simply allows operator to prolong the primary term, despite absence of production, by starting new wells in attempt to produce. Pooling is a simple concept, your acres are pooled with others, but gets complicated for large tracts that sprawl outside the pool boundaries. “Shut-in” allows operator to temporarily cease production if market is awful, which is a good thing at times like COVID if prices plummet, you prefer your oil to remain underground than be sold at $15/bbl, but shut-in duration is limited to prevent lessee holding your minerals indefinitely without royalties.
Short answer most of the individual mineral owners in our 640-acre pool signed an identical 8-page model lease, these leases range from 1 acre to 40 acres … our pooled unit has only a few dozen mineral owners, many of them related/associated, mostly 40-acre & 10-acre tracts. The majority signed identical leases/addendums with identical text. One 40-acre undivided tract has 13 small cotenants, some own only one acre, but each has that same lease replicated from the model lease negotiated by the largest mineral owners. My impression was once the lessee agreed to terms with the big 40-acre lessors, the lessee didn’t want to waste time haggling with 1-acre lessees and simply put everyone into the same lease.
AnnR is 1 of 5 related owners, not sure of her situation, if undivided 5-acre tract (?) my advice is try to find if other large owners negotiated good terms and clone it if attractive terms.
Thanks for the info. My lease I believe is the standard one as well with the 12 clause addendum attached. I finally got time to talk to the landman yesterday and he was very helpful. He went over every clause in the addendum with me. I told the landman I was on this site and he said good. That can be helpful for you but also confusing. Nobodies situation is the same he said. I am still curious about the sign on bonus though. I’m going to try and find a way to see what the bonuses are in my area. Thanks again for the info. Some of all this is finally starting to make since!!!
Remember ROSEWOOD RESOURCES offered the county $ 4,200.- per acre as a bonus. I had a landman brag to me about how he got a land owner to accept half of what they should have been MINIMALLY paid for an easement according to the University Land Rate and Damage Schedule. Most items inthe UL Rate and Damage Schedule are minimum numbers with the word NEGOTIABLE I would call the Langley & Banack Law Firm, who negotiated the lease with Rosewood for the county, to see what the royalty was. The lease should be a public record.
I accidently hit the send button.
Most items in the UL Rate and Damage Schedule are minimum numbers with the word NEGOTIABLE beside them. I ask, and get most of the time, 3x that amount.
I would call the Langley & Banack Law Firm, who negotiated the lease with Rosewood for the county, to see what the royalty was. The lease should be a public record.
Yes, I do remember the $4,200.00 sign on bonus. But that was in Nov. of 2020. I’m assuming things change quite a bit surrounding the oil and gas business!!! Been online this morn trying to figure out what the current rate of bonuses are going for in that area. I’m also thinking all 5 of us need to be on the same page with all this! So waiting to talk to the rest of the family as well. But will continue learning as much as possible! Thanks again for helping!!!
The price of West Texas Intermediate Crude in Nov 2020 was $37. Yesterday it was $64. The oil companies are really smiling now. Those who make the big bonuses hold firm. $4,200 is my bottom. The two biggest checks you get on an oil lease are the bonus and the first royalty check. I am the “landman” for our extended family of over 12 folks with 1920 surface acres and over 1950 royalty acres on six sections. I have learned the hard way. The oil companies now refer to me as a “knowledgeable” land owner. You have an excellent basis for your bonus request. Do not budge. I would tell them "If you offered $4,200 you are wiling to pay $5,000. " Ask and you shall receive. Don’t ask and you will receive less.
Best wishes
Lease bonus is per acre, per “net mineral acre”. Bonuses are/were often above $10,000 per acre in the “red hot” areas e.g. Reeves, Culberson, Midland area … before the pandemic, not sure what bonuses are now.
Lease bonus amounts are also tied to the royalty percent. Lower royalty, higher bonus. Higher royalty, lower bonus. Many of us pick a higher royalty and a lower bonus. In many cases, the bonus is relatively small compared to the longer term value of the higher royalty on one well or multiple wells over the life of the well(s).
The first line in you addendum should say something to the effect:
If there be any conflict between the provisions of this addendum and any of the provisions of the above lease, then the provisions of this addendum shall be controlling.