Royalties vs Mineral Rights
If you own a farm, then you own the land also known as the surface rights. Often, when you bought the farm, your deed conveyed the mineral rights under the farm along with the surface rights. Owning the mineral rights means you legally have the right to explore, extract, and sell any oil,
Most landowners, however, don’t have the geological knowledge or training to understand the potential minerals under their land. In fact, many landowners forget they own the mineral rights under their land. Further, the average landowner does not have the multi-million dollar budgets to explore for hydrocarbons, or the social networking skills to raise a multi-million dollar exploration fund.
Energy companies do have the knowledge and funding to explore for oil and
The Bonus and the Royalty
The mineral owner receives two forms of compensation for leasing his mineral rights. The first is called a ‘Bonus Payment’ which is a signing bonus that is paid on a per acre basis. Typically $200-$500 per acre. The bonus will be paid once at the time of the signing of the lease, and it may be the only money the owner will get.
The second is the royalty which is the percent of the money generated by the oil and
However, if the oil company finds no oil or
In the event hydrocarbons are found and the wells produce, then the royalties kick in. So if the well produces 100 barrels a day, and the price of oil is $80 per barrel that month, then the cash flow is 100x$80 = $8,000/day The royalty owner, who agreed to 15% royalty, would receive $8,000 x 0.15 = $1,200/day. Over a month, that brings in $36,000 per month to the mineral owner, who in this case, is the landowner. Now you see why oil is a big business!
Royalties Dwindle Over Time
Royalties paid to the mineral rights owner will often last for decades. The wells will deplete, however, so over time the money received from royalties will drop considerably. The average well is thought to last 35 years. Eventually, the royalty dies, and all the owner has is the mineral rights. Which may get leased again in the future.
Finding Mineral Rights to Buy is Hard
Because of the reliable cash flow stream, oil and