What’s the difference and how are they used?
Every petroleum landman should know what’s the difference is between the two terms and how are they used? Why so? In some part of the country the Net Royalty Acre calculations are used rather than the Net Mineral Acre method.
One of the main differences between a ’Net Royalty Acre’ and a ‘Net Mineral Acre’ is what they provide and what they are used for. For example: Net Royalty Acre is used to determine values for minerals that are for sale, whereas Net Mineral Acre is used to determine values for leasing.
In addition, Net Mineral Acres provide the actual amount of land which is in a pooled unit. Another important difference is that the Net Mineral Acre provides a way to determine the Net Royalty Acre’s value. In other words, you would use the Net Royalty Acre to determine what the minerals were worth in the sale of them.
The following is an example of a Net Mineral Acre calculation: A mineral owner owning an undivided 1/4th interest under a surface tract of land containing 160 gross acres of minerals. The mineral owner would own 40 net mineral acres (160 / 4 = 40) or in other words, a net 40 acres under the gross 160-acre tract.
Net Royalty Acre, however, has two definitions and they should be defined in any legal document in which it appears. First Definition: “A royalty acre is the full lease royalty on one acre of land.”
A simple definition
The net royalty acre is divided by total acreage in the tract. The quotient is multiplied by lease royalty to derive the portion of production to which the royalty owner is entitled.
An example
Ten royalty acres in a 100-acre tract covered by a lease carrying a 1/4 royalty would entitle the royalty owner to 2.5 percent of production. Or, 10/100 = 10% of the minerals subject to a 25% royalty - 10/4 = 2.5 net royalty acres. It is important to know this number especially when buying mineral or royalty interest.
Another example
A mineral owner owns 50 royalty acres out of a 32,808.5-acre tract is entitled to receive 50/32,808.5 of royalty, not a 50/32,808.5 fixed royalty.
The following is an example of determining what the price per mineral acre is worth by using Net Royalty Acre calculations. 100 Net Mineral Acres was leased with a 3/16ths royalty provision or 18.75%.
An offer of $100,000 was made to purchase the minerals that have been leased. You simply take the 100 Net Mineral Acres and multiply them by 18.75% or .1875 = 18.75 Net Royalty Acres. Next you divided the $100,000 by 18.75 for a sales value of $5,333 per Net Royalty Acre.
Second Definition
A net royalty acre is “that part of the interest in 1/8th of the oil and natural gas produced from one acre.” By this definition, a net royalty acre entitles its owner to a fixed portion of production.
The term Net Royalty Acre should not be used unless all parties agree on its meaning. Each instrument or agreement that uses the term should define the term so that all parties understand its meaning.
For more in depth information regarding certain “landmines” regarding the oil and gas lease, you should take the Institute of Energy Management’s course “Concepts of the Oil and Gas Lease Essentials.”
Enroll today at www.InstituteOfEnergyManagement.com