What’s the difference and how are they used?
An advantage of thorough and applicable Petroleum Landman Training comes from highly experienced oil and gas attorneys, senior right-of-way personnel, and senior landmen (See: The Advisory Board of the Institute of Energy Management) who, in their career, have dealt with certain “landmines” (like this subject) and how they resolved them.
Many Landman training courses do not address what a ‘Net Royalty Acre’ vs a ‘Net Mineral Acre’ is, the difference between them. 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 whether in purchasing minerals or an oil and gas lease. For example: The term, Net Royalty Acre, is used to determine values for minerals that are for sale, whereas the term, Net Mineral Acre, is used to determine values for oil and gas leasing.
- Net Mineral Acres provides the actual amount of land which is in a pooled unit. For example: 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. This 40 Net Mineral Acres is the basis for determining how much a ‘lease bonus’ would be. For example: If an Operator offers $1,500 per Net Mineral Acre for a lease bonus, the Lessor will receive 40 x $1,500 = $60,000.
- Another important difference is that the Net Mineral Acre provides the Landman 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. Net Royalty Acre, however, has two definitions and they should be defined in any legal document in which it appears.
“A royalty acre is the full oil and gas lease royalty on one acre of land.” A simple definition is that the Net Royalty Acre is divided by total acreage in the tract. The quotient is multiplied by oil and gas lease royalty to derive the portion of production to which the royalty owner is entitled.
Ten royalty acres in a 100-acre tract covered by an oil and gas 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.
A mineral owner owns 50 Net 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.
50 Net Mineral Acres was leased with a 3/16ths royalty provision or 18.75%.
An offer of $75,000 was made to purchase the minerals that have been leased. Take the 50 Net Mineral Acres and multiply them by 18.75% or .1875 = 9.375 Net Royalty Acres. Next you divided the $75,000 by 9.375 for a sales value of $8,000 per Net Royalty Acre.
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 in a transaction 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.
The Petroleum Landman School, Professional Landman Schools, and the Institute of Energy Management’s courses deal with many other critical issues to help a Petroleum Landman become more aware of things which could become critical issues.
Please visit www.instituteofenergymanagement.com for a complete list of the most comprehensive and applicable Petroleum Landman training courses available.