Know About Oil and Gas Royalties and How They are Calculated

Oil and Gas Royalties: Royalties are the amount paid to the land owners for giving the right to develop land, or to do oil and gas extractions. If any one has a land with some mineral deposits and he/she is not interested in developing or extracting the minerals, then they can lease their mineral rights for particular point of time, so that the person who leases the rights will either develop or extract minerals of that land. In return to what the lessee is getting from the land he/she pays some amount to the land owner depending on the amount of production and the percentage of share as decided according to the agreement which is made prior to the production.

In general all the royalties are paid in the monetary units of the country. However, if the owner needs his share in form of oil he/she can get oil as royalty in case of oil leases. Whereas, for gas lease the royalty should only be in money and no other means is possible. However, most landlords choose to take the royalty in cash to avoid all the marketing headaches they need to face for selling the oil again. In few cases, the owner takes oil in royalty and again sells it to the lessee, if the oil price is quite high at that point of time.

Calculation: On federal lands the royalty share of the value produced is to be paid in the monetary units of the country, that is in dollars. According to the Office of Natural Resources Revenue (ONRR), the land owner gets a share of 1/6th or 1/8th of the production less deductions which are spent on post production and transportation away from the lease. For example, if a barrel of crude oil produced on the federal lands were sold for $48, the royalty due for that barrels would be 1/8th that is $6 of the selling price. The total royalty would be $6 multiplied by the number of barrels produced that day.

In the agreement of oil and gas lease, the royalty clause contains the information about the percentage or the amount of royalty to be paid to the landowner. The land owner can however, specify separate royalties for oil and gas production and can also mention the time in which he/she is expecting the payments to be made, can include the interests for late payments etc.

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