For those first diving into the world of mineral management, they may find themselves lost in a maze of jargon. But with the help of the right mineral management terminology guide, and with time and experience, you too can grow from a novice to an expert, capable of navigating this complex landscape. Now, as a leading mineral management company, we’ve crafted this terminology guide to pass on this knowledge.
The basics of mineral ownership
Mineral rights: Owning land doesn’t necessarily mean you own what’s beneath it. We have had several instances where prospective clients believed they owned the minerals beneath their property. However, upon closer inspection, it was discovered that they only had surface rights. Understanding the difference is crucial. Surface rights concern the surface of the land, while mineral rights pertain to the resources underneath.
Royalties: Royalties are like the golden ticket of mineral management. When clients receive their first royalty check, the excitement is palpable. Think of royalties as your share of the production revenue. They differ from rent or bonuses, which are often one-time payments or periodic incentives.
Working interest: We have had several clients dive headfirst into mineral management without consulting a mineral management company first. They were shocked when they had to contribute to the well’s operational costs. As a working interest owner, you share in the expenses but also the potential profits of oil and gas production.
The leasing process
Lease agreement: This binding contract determines how minerals are explored and produced. Just like when you rent an apartment or build space, terms and conditions apply. Always read it thoroughly!
Bonus payment: This is akin to a signing bonus. It’s a one-time upfront payment given when the lease is signed.
Primary term vs. secondary term: Think of these as the “lease life stages.” The primary term is the initial lease period, while the secondary term extends as long as there’s production.
Shut-in royalties: A client once referred to these as “rain checks.” If a well is temporarily non-producing, shut-in royalties help keep the lease alive.
Key terminologies in drilling and production
Spud date: The day drilling begins. It’s akin to the first step of a marathon, marking the beginning of a potentially fruitful journey.
Pooling: Imagine neighbors coming together for a community garden. Pooling combines small tracts for efficient production, ensuring everyone gets their fair share.
Unitization: This is pooling’s big brother. It involves combining large tracts, sometimes entire reservoirs, to maximize production. When our client’s land is unitized with others, they benefit from a much more efficient operation.
Net Revenue Interest (NRI): This percentage determines your share of the profits. This is something clients very quickly learn to recognize to be extremely important. The importance of accurate NRI calculations – even a small decimal point difference can amount to thousands over time!
Managing production revenues and costs
Division order: The division order is every mineral owner’s roadmap to understanding payments. It ensures everyone gets paid their rightful share.
Depletion: This is a tax perk, allowing mineral owners to account for the reduced quantity of minerals. Like depreciation for assets, it’s a way to offset production income.
Joint Operating Agreement (JOA): When several parties co-own a producing property, this agreement lays out responsibilities.
The environmental and safety lingo
Reclamation: After production, land can be in need of maintenance and enhancements. Reclamation ensures sites are restored. We have seen firsthand barren lands turned into green fields, all thanks to rigorous reclamation efforts.
Plugging and Abandonment (P&A): When a well’s life ends, it’s sealed and abandoned safely. It’s the final goodbye, ensuring no environmental hazards remain.
Environmental Impact Assessment (EIA): Before drilling, companies assess potential environmental impacts.
Navigating legal and compliance jargon
Held by Production (HBP): If a property produces minerals, the lease remains active. We often compare HBP to a light bulb – as long as it’s shining, the energy (or production) continues.
Severance taxes: These are state taxes on produced minerals. They are similar to that of paying dues – a little share to support state initiatives.
Force majeure: This clause in contracts accounts for unexpected disruptions, such as unforeseen drilling delays due to a natural disaster.
The mineral management journey, with its intricate jargon, can seem daunting. But with our mineral management terminology guide, and equipped with understanding, you’re not just an owner; you’re an informed stakeholder. Lean on experts, ask questions, and always stay curious.
Still have questions? Contact our team today!
The information provided by Valor in this blog is for general informational purposes only, not to provide specific recommendations or legal or tax-related advice. The blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.