Welcome to Episode 3 of the Mineral Rights Podcast!
Using the embedded player above, you can download the episode to your computer or listen to it here!
Key Points:
In this Episode, we show you how to calculate your Net Revenue Interest (NRI) in a well in 3 simple steps. We also cover how to estimate your royalty check amount based on this and other readily available information.
3 Steps to Calculate Net Revenue Interest (in any order):
- What you will need to get started is an understanding of how many Net Mineral Acres (NMA) you own,
- The size of the Drilling Spacing Unit (DSU) where the well is located, and
- The agreed royalty rate from your oil and gas lease.
Usually, these 3 items are fairly easy to find and we cover how to find them if you don’t already know.
Side Note: In this example, we assume that the royalty is not burdened by a Non-Participating Royalty Interest (NPRI). Identifying if there is a NPRI usually requires performing a title search to understand the history and if anything was carved out. For the purposes of this article, we will assume that the royalty is not burdened by a NPRI. If your family has owned the minerals back through time then this situation likely would not apply to you anyway.
If you aren’t familiar with NPRI’s, then listen to Episode 2 where we cover briefly the definition of an NPRI and how they are created.
Throughout this episode, I refer to an example in North Dakota but the concept applies to any state. Here’s the link to the North Dakota Industrial Commission’s Oil and Gas Website as mentioned in the show.
1 Calculating the Net Mineral Acres (NMA):
Let’s say that you own mineral rights in all of Section 17, Township 139N, Range 101W in Billings County, North Dakota. The gross acres for this section is 640 acres, and you own 1/40 interest in this tract as of today’s date. Your decimal interest in this tract is 0.025 so:
Net Mineral Acres = 640 Acres x 0.025 = 16 net acres.
2 Finding the Size of your Spacing Unit:
Fortunately, this information is usually available on your State’s Oil and Gas Commission Website. In the case of our example, we went to the North Dakota Industrial Commission, Department of Mineral Resources, Oil and Gas Division website for this information. The GIS Map Server shows the Drilling / Spacing Units in a layer that you can turn on. Let’s assume for the purposes of this example that I just found out that a Horizontal Bakken well is permitted on my minerals in Section 17. Section 17 is part of a 1280 acre DSU that includes Sections 17 & 20 of Township 139N, Range 101W.
3 Finding Your Royalty Rate:
You can find this information on your Oil and Gas Lease. On the first page look for a statement like:
“The lessee shall deliver to the credit of the lessor as royalty, free of cost, into the tanks or in the pipe line on the leased premises to which lessee may connect its wells the equal fifteen-percent (15%) part of all oil produced and saved from the leased premises.”
In this case, the Royalty Rate is 15%. There will also be a similar statement referring to payment for gas sold. This is your Royalty Rate and you will need it to calculate the Net Revenue Interest. If you don’t have the lease, you can perform a search in your county clerk & recorder’s office or hire the services of landman to do it for you.
Let’s do some math!
Ok so maybe you didn’t like math in school. Have no fear, all we have left is a simple multiplication problem so go get your calculator. What are you waiting for, go get it now!
Net Revenue Interest = Net Mineral Acres / Drilling Spacing Unit Acres * Royalty Rate
Continuing our example, here’s what we know:
Net Mineral Acres = 16 Acres
DSU Size = 1280 Acres
Royalty Rate = 15%
So, our NRI = 16 / 1280 * 0.15 = 0.001875
This means we will receive 0.1875% of any oil or gas sold on this new well.
IMPORTANT: In this example, we assume that 100% of our acreage is inside the DSU in question. If our acreage is only partially in the DSU (for example, if the DSU spans part of a section that cuts through our acreage), you will need to multiply this NRI result by the percentage of your acreage inside that DSU. For example, if only half of your land is in a particular DSU, you would multiply the NRI calculated as above by 50% since half of your tract is part of that DSU and the rest is part of one or more other DSU’s. Or, if you know the number of Net Mineral Acres that are part of a particular DSU, use that number in the NRI calculation rather than the total number of Net Mineral Acres owned.
Estimating Your Royalty Check:
To put the NRI in perspective, let’s put this in terms of dollars and cents.
In our example, let’s look at nearby Horizontal Bakken wells drilled on 1280 Ac spacing, They appear to average around 10,000 bbls of oil total over the first 3 months of production. So assuming our new well averages this, and the price of Bakken crude is $50/bbl, here’s what we might expect in the royalty check for this one well for these months:
Gross Owner Interest (before tax) = Gross Volume x Gross Price x NRI or:
10,000 bbls x $50/bbl x 0.001875 = $937.50
And this is just for the oil produced (you can calculate gas revenue the same way). Not too bad for income you likely weren’t expecting to receive! To be able to estimate how much you will receive based on future production forecasts becomes more of an engineering exercise. But now you see that you don’t need to worry about higher math in order to estimate your royalty payment.
In this example our lease terms are royalty free of cost. Your lease might include the right of the operator to deduct certain costs (e.g. processing and transportation) in addition to the standard severance and local taxes that will be deducted. If you aren’t sure, consult a professional!
Resources Mentioned in the Show:
- Legal Description and Survey Systems article that explains how to read them and how to decipher what it means.
- What is a Division Order? PDC Energy does a nice job of describing a Division Order and how it is used and providing an example Division Order for reference.
- To help you visualize all of this using an existing example, we’ve put together a free NRI and Royalty Check Estimator Worksheet. Just input your numbers and it will calculate your NRI and estimated royalty check amount.
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Matt
