If these commodities are so valuable & last so long why would anyone want to sell them?
Selling all or just a portion of ones mineral rights provides a lump sum of capital rather than receiving long term monthly payouts. This can benefit either the Operating company in further development of the field or the farmer who needs a quick influx cash for a large purchase.
What is the risk to owning royalties?
Oil and Gas royalties are tied directly to the field production and the price of the commodity. Having historical production allows more accurate projections
Where in the IRS code does it show the tax benefits to owning royalties? IRS code showing the tax benefits in buying royalties via 1031 exchange? Once I own royalties, are there any expenses, management fees or maintenance necessary?
There are no further expenses for the royalty owner after the initial purchase. Any further capital expenditures are paid for by the operating company and/or the working interest holders.
What type of documentation/verification do I/should I receive when purchasing royalties?
You will receive a mineral deed recorded with the county the property is located in.
Who would I contact to perform a 1031 exchange?
Your representative at Heritage will put you in touch with a Qualified Intermediary to facilitate the exchange.
How long does the 1031 exchange process take?
The property must be identified within 45 calendar days post-closing of the first property and purchase of the replacement property must occur within 180 calendar days. While these dates limit the time to complete the transaction, the actual process can be as quick as the sending of paperwork and the transference of funds.
How long after purchase do I start to receive revenue?
You will begin to receive revenue in as little as 30 days.
Where does the royalty revenue come from and how often?
The revenue will come directly from the operating company and be distributed on a monthly basis
Can I sell my royalties down the road?
Yes. The royalty market is very active. Owning a producing mineral deed makes the process as simple as finding a buyer.
Who would I sell them to?
Heritage Land & Minerals will be glad to assist you in finding a buyer for your minerals.
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Definitions
- A
- API Number – unique identifying number for all oil and gas wells drilled in the U.S. The system was developed by the American Petroleum Institute.
- Assignment – The legal instrument whereby Oil and Gas Leases, Royalty Interests, or Overriding Royalty interests are assigned or conveyed.
- B
- BOPD – The abbreviation for barrels of oil per day.
- C
- Commercial Well – A well that produces oil and/or gas in sufficient quantities such that proceeds from the sale of production exceeds directly related costs.
- Completion – This is the process which takes place immediately after the drilling operation is complete. This involves the setting of casing, tubing, packers, possibly down hole pumps, possibly hydraulic fracturing, possibly installing sand screens etc.
- Cost depletion – One of the two calculation methodologies allowed by the IRS for calculating the depletion allowance on oil and gas royalty revenue. The other methodology is called percentage depletion
- D
- Decline Curve – The graphic representation that shows how hydrocarbon production rate changes over time
- Depletion – With respect to oil and gas production, the process by which a producing reservoir is depleted (or produced) of it’s hydrocarbon.
- Depletion Allowance – The tax deduction allowed by the IRS for royalty and mineral owners to offset the decrease in value of a capital investment caused by the production (depletion) of minerals.
- Developmental Well – A well drilled to a known producing formation in an existing oil field.
- Discovery Well – The first oil or gas well drilled in a new field. The discovery well is the well that is drilled to reveal the actual presence of a petroleum-bearing reservoir. Subsequent wells are called development wells.
- Division Order – A schedule of owners and their decimal ownership share in revenues of a well’s production derived from the sale of oil or gas.
- Division Order Title Opinion – An opinion, generally written by an attorney, stating the names and decimal ownership interests within a producing oil or gas well, unit, or lease.
- E
- Easement – An easement is a created interest which allows useage for a stated purpose. In oil and gas, this is most commonly for installing and operating pipelines.
- Executive Rights to Minerals – Executive rights include the right to negotiate and execute oil & gas leases, lease bonuses, and delay rentals. The executive right is usually referred to when a Non-Participating Royalty Interest exist. The owner of the mineral fee estate holds executive rights.
- F
- First right of Refusal – A provision in leases stating that the operator has the right to top lease before any third party does. (This in effect is an option – the option to review and preempt a transaction by another party).
- Flush Production – The phrase used to describe the initial “rush” of production that usually comes from a producing well after it is first completed and put on line. This flow rate is usually much higher than the rate which will be sustained. Operators also use the term Peak Flow Rate to describe Flush Production
- Formartion – Geological term that refers to a separate layer of rock or group of intermingled beds.
- Fracking, Hydraulic Fracturing, Fracture,. Fracing, Frac Job – The process of using high pressure to pump sand laden gelled fluid into subsurface rock formations in order to improve flow into a well bore.
- G
- Grantee – The person receiving lands, minerals, etc.
- Grantor – A person who grants or conveys lands, minerals, etc.
- H
- Held By Production, HBP – Mineral lease provision that extends the right to operate a lease as long as the property produces a minimum quantity of oil & gas.
- Horizontal Drilling – A well of which a portion is drilled horizontally to expose more of the formation surface area to the well bore.
- Hydrocarbon – An organic chemical compound of hydrogen and carbon, called petroleum. The molecular structure of hydrocarbon compounds varies from the simplest, methane (CH4), a constituent of natural gas, to the very heavy and very complex. Octane, for example, a constituent of crude oil, is one of the heavier, more complex molecules.
- I
- Infill Drilling – Wells drilled to fill in between established producing wells on a lease.
- Intial Production – The rate of initial flow from a well.
- L
- Lease – The generic name for an Oil, Gas and Mineral Lease (OGML).
- Lessee – The purchaser (taker) of an Oil, Gas and Mineral Lease.
- Lessor – The Party Who grants an Oil, Gas and Mineral Lease.
- M
- Mineral Lease – An instrument which sets out the terms by which one party leases the right to explore and produce (if found) certain minerals within a specific tract or tracts of land. In the oil and gas industry, this is sometimes referred to as an Oil, Gas, and Mineral Lease (OGML)
- Mineral Owner – Owner of the rights and interests in a mineral estate (where interests in a landed estate have been severed) along with the right to execute a lease on the same.
- Mineral rights – The ownership of the minerals on or under the surface, with the owner having the right to capture or recover and the right to delegate owner rights to another party to recover mineral by negotiating a lease agreement.
- Mineral Title – Refers to the legal ownership of the mineral estate (minerals), generally referred to as associated with a particular tract of land.
- N
- Net Revenue Interest, NRI – An owner’s interest in the revenues of a well.
- Non-Producing Mineral Owner – An owner of minerals that are not currently being produced and sold.
- O
- Oil & Gas Mineral Lease – The agreement outlining the basic terms of developing lands or minerals such as royalty to be paid, length of time, description of lands.
- Overiding Royalty Interest, ORRI – A royalty in excess of the royalty provided in the Oil & Gas Lease. Usually, an override is added during an intervening assignment. ORRIs are created out of the working interest in a property and do not affect mineral owners. An overriding royalty interest (ORRI) is often kept or assigned to a geologist, landman, brokerage, or any entity that was able to reserve an interest in the properties.
- P
- Participating Royalty Interest – A royalty interest giving its owner the right to “participate” in bonuses received and in any oil or gas found.
- Pooled unit – Unit created by combining separate mineral interests under the pooling clause of a lease or agreement.
- Possible Reserves – Possible reserves are less certain than Probable reserves and can be estimated with a low degree of certainty. Used to refer to reserves that have a greater than 10% chance of being recovered (P10)
- Probable Reserves – Probable reserves are less certain than Proved reserves and can be estimated with a degree of certainty sufficient to indicate that they are more likely to be recovered than not. Used to refer to reserves that have a 50% or greater chance of being produced (P50)
- Producer – A producer of oil and gas, also sometimes referred to as an Operator, or the Oil Company
- Producing Mineral Interests – A mineral interest upon which production is actively taking place and minerals being removed and marketed. Oil & gas leases often have stipulations that require“commercial quantities” for continuation of a lease.
- Producing Mineral Owner – An owner of minerals that are currently being produced and sold.Payments made to producing mineral owners are known as royalty payments or royalties.
- Proven reserves – Oil or gas which has not yet been produced but has been located and is economically recoverable. Used to refer to reserves that have a 90% (P90) or better probability of being produced in the current environment.
- Q
- Qualified Intermediary – An advisor that prepares documents and ensures proper handling of funds relating to the 1031 exchange process.
- R
- Reservoir – A porous, permeable sedimentary rock containing oil and gas
- Reservoir Engineering – The application of scientific and engineering principles to the production from a developed reservoir for maximum economic return.
- Revenue Statement – The monthly statement sent by either the First Purchaser or the Operator to the interest holders within an oil or gas producing property. These statements detail production volumes and pricing for hydrocarbons that are produced and sold each month.
- Royalty – Revenue generally received by a mineral owner from the production of oil or gas, free of costs (except taxes).
- Royalty Interest – An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage.
- Royalty Percentage – Percentage of gross or net production that is paid to the mineral owner. Usually described as a fraction (1/8th, 3/16th, 1/6th, 1/5th, 1/4, etc.)
- Royalty Statement – Account of finances that details a wells production and prices received. Mineral Owners receive these monthly or as revenue crosses certain thresholds depending on the state and operator.
- S
- Secondary Recovery – Enhanced recovery of oil or gas from a reservoir beyond the oil or gas that can be recovered by normal flowing and pumping operations. Secondary recovery techniques involve maintaining or enhancing reservoir pressure by injecting water, gas, CO2 or other substances into the formation.
- Severance – The separation of a mineral or royalty interest from other interests in that land.
- Severance Tax – A state tax levied against both royalty and working interest owners upon their pro rata share of oil and gas production. Each state sets its own severance tax rates, and often have special provisions for low rate wells, secondary recovery wells, etc.
- Severed Minerals – Minerals whose title has been severed from the surface title.
- Shut In Royalty – Payment to royalty owners under the terms of a lease which allows the lessee to defer production from a well capable of producing but shut in for lack of a market.
- Surface Estate – Rights and interests in the surface of land as opposed to the mineral estate.
- Surface Owner – Owner of the rights and interests in a surface estate.
- Surface Rights – The set of rights associated with the surface of the land only, as differentiated from mineral rights.
- T
- Three (3-D) Seismic, Three Dimensional Seismic – Advanced method for collecting, processing, and interpreting seismic data in three dimensions. Three-dimensional seismic data is collected from closely spaced lines over an area of interest. The advantages of using three-dimensional seismic include increased resolution as well as improved interpretational tools and data displays.
- Title Abstract – A chronological history of the ownership or significant events effecting a particular piece of property.
- Title Curative – Measures taken to fix any defects in the chain of title (ownership history), which includes correcting instruments and reconciling title with the use and possession of land.
- U
- Undeveloped Acreage – Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas.
- Unitization, Unitization Agreement, Unit Agreement – Joint operations to maximize recovery among separate operators within a common reservoir.
- W
- Well Site – The physical location on which an oil or gas well is drilled. The size of the well site generally ranges from about ½ to 2 acres, depending on the foot print of the production facilities needed.
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