Common Oil & Gas Terms
Get your metal lunchboxes and backpacks ready. It's back to school with Oil and Gas definitions!
Also, be sure to check out of FAQ page! There you will find a wealth of information with Q&A's related to all things minerals and royalties.
Abandoned Well - A well that is not being used either because it was a dry hole (see below), or because it ceased to produce in commercial, paying, or economic quantities.
Abstract of Title – A chronological history of ownership, including significant historical events like sales and inheritance, to prove who owns the minerals associated with a particular piece of property. This document is typically prepared by an abstract or title company and certified by the preparer to contain all pertinent information or copies of all documents affecting title to a given piece of property.
Assignee - The person or company who has been assigned an Oil and Gas Lease or Overriding Royalty by an Assignor.
Assignment - A legal document that assigns or conveys Oil and Gas Leases or Overriding Royalties.
Assignor - The person or company who has conveyed an Oil and Gas Lease or Overriding Royalty to an Assignee.
Bonus (or Lease Bonus) – An upfront cash settlement, or consideration, paid to a lessor (i.e. mineral owner or surface owner) by the lessee (i.e. operator) after signing a lease and providing the operator a legal right to develop the minerals. The amount sometimes is, and sometimes isn’t, defined in the lease, just depends. This bonus is in addition to any royalty paid if/when a successful well is producing.
Check Stub - Once a well is producing, a revenue statement or check (or stub) which documents the name of the well(s), production month, volume produced, price received, net interest of the payee, and any deductions the operator takes out from the production.
Clear or “Marketable” Title - Absolute and unquestionable legal ownership of specific minerals, free of lien or levy from creditors or other parties. Without “clear title”, the minerals carry risk of future lawsuits and claims and could potentially reduce their value.
Cloud on Title - A cloud on title is any encumbrance that puts a title to real property into question. Examples of encumbrances are foreclosure proceedings, liens on a property, probate, or fraudulent titles. Clouds on title are resolved through forms of “curative work” by filing some other form of deed or document that “clears” up the discrepancy.
Conveyance - A legal document, usually a deed (or assignment), which transfers property title from one party to another.
Delay Rental - Yearly payments made during primary term to a Lessor to delay drilling.
Depth Rights - Mineral rights for a specified range of depth. As an example, mineral owner 'A' can retain the Depth Rights for the first 3000' below the surface, and sell the Depth Rights for everything below 3000' to mineral owner 'B.’ If a well produces at 5000', mineral owner 'B' would get the associated royalty.
Division Order - A list of all parties with a revenue interest in a given well, along with their associated decimal share of the revenues from the sale of produced oil and gas. This list is usually circulated, reviewed, and approved prior to drilling the well.
Dry Hole - An unsuccessful well, which didn't result in sufficient quantities of oil and gas to make it economically viable to operate
Executive Rights - The rights to negotiate an oil and gas lease. These rights are not always tied directly to ownership.
Extension Bonus - An additional cash payment made after the expiration of the primary term to extend the lease. The amount is defined in the original lease agreement and applied only if that lease grants the lessee the option to extend the Oil and Gas Lease.
Grantee - The party in a conveyance receiving the land, minerals, etc. from the current owner (Grantor).
Grantor - The party in a conveyance who currently owns the land, minerals, etc., who is conveying (i.e. granting or selling) them to another party (Grantee).
Gross Mineral Acres - Total number of acres in a given tract of land. (e.g. if the family ranch is 100 acres, the gross mineral acres is 100 acres). If the ranch and all the minerals are owned equally by 10 family members, each family member is said to own 10 net mineral acres of 100 gross mineral acres.
Held By Production (HBP) - A common condition in a lease that extends an operator's exclusive right to operate the lease as long as they are producing a commercial amount of oil and gas.
Joint Operating Agreement - An agreement among working interest owners describing how a well is to be operated.
Landman - A person who negotiates with mineral owners for the sale or lease of their minerals,
typically on behalf of another party. A Landman is also typically responsible for performing preliminary title research in the local courthouse and abstract plant.
Lease (also ‘Lease Agreement,’ ‘Mineral Lease’) - A legal document between a mineral owner and an operator (typically) which defines, in its most basic form, the legal location of the minerals, the term length, bonus, royalty, possible extensions, and potential surface damages.
Legal Location - The geographical description of the property (minerals) for the purpose of a legal document or transaction.
Lessee - The person or party who receives the lease, sometimes called the tenant (i.e. operator).
Lessor - The person or party granting the lease, sometimes called grantor (i.e. mineral owner).
Mineral Deed - A legal document (conveyance) which declares the transfer of ownership of specific oil and gas minerals rights. This document is executed, notarized, and recorded in the local county courthouse whenever the minerals being sold or transferred are located.
Mineral Owner - A party who owns the minerals under the surface of a specific property and has associated rights to those minerals (i.e. the right to execute a Lease)
Mineral Interests or Rights - Rights to oil, gas, and other minerals at or below the surface of a tract of land. Any or all these rights may be conveyed by the owner.
They include: 1. The right to develop 2. The right to execute a lease 3. The right to receive lease bonus consideration 4. The right to receive delay rentals 5. The right to receive royalty payments
Minerals - Primarily crude oil and natural gas, but may also include any element or chemical compound that has been formed as a result of a geological process such as gemstones, coal, iron ore, gold, silver, copper, etc.
Net Mineral Acres (NMA) - The net acreage owned by a mineral owner of a specific tract of land. For example, if a 200 gross acre tract of land is owned by ten equal partners, each with 10% ownership, then each would be said to own 20 net mineral acres. See our full blog and infographic on Understanding Net Mineral Acres and Net Royalty Acres.
Net Royalty Acres (NRA) – The term “net royalty acre” is used by mineral and royalty buyers to price a mineral or royalty interest that is subject to an oil and gas lease. For many years, the “standard royalty” given in an oil and gas lease was 1/8 or 12.5%. So hypothetically, if you own 100 acres of land and all the minerals and you leased your minerals for the “standard 1/8 or 12.5% royalty”, you would own 100 net royalty acres. Now, if you leased for 25% royalty, because this would be double the “standard royalty”, you would now own 200 net royalty acres. See our full blog and infographic on Understanding Net Mineral Acres and Net Royalty Acres.
Net Revenue Interest (NRI) – An owner’s interest in the revenues of a well. An owner's revenue interest correlates directly to that of the royalty stipulated in the Lease. If a mineral owners royalty stipulated in a Lease is 20%, the NRI equates to 20% to the mineral owner and 80% to the operator. Which means the mineral owner gets 20% of the revenue received from the sale of the oil and gas produced and the operator gets 80%.
Non-Participating Royalty Interest (NPRI) – A non-participating royalty interest owner has a right to all or a portion of the royalty from gross production but does not have the right to make decisions for, or able to, execute an oil, gas, and mineral lease, receive any lease bonus, or any delay rentals. An NPRI owner also does not have the right to produce the minerals by himself, and they are not responsible for the operational costs associated with production or drilling. An NPRI owner has fewer rights than a mineral rights owner as they’re only able to ratify (accept the terms and conditions of) an oil, gas, and mineral lease that the mineral owner has already executed. Mineral rights owners generally are able to participate in at least one or more of the aforementioned activities.
Operator - The party responsible for the development, management, and day-to-day operation of oil and gas wells on a specific property, governed by the terms and conditions of a Lease agreement.
Overriding Royalty Interest (ORRI) – A royalty interest is usually derived when one “reserves” a percentage of the royalty between what is stipulated in the lease and what the operator receives.
Paid-up Lease – An oil & gas lease where any delayed rentals that might need to be paid during the primary term of the Lease are paid as part of the lease bonus.
Participating Royalty - A royalty interest giving its owner the right to "participate" in bonuses received in leasing along with the right to "participate" in any oil or gas revenue’s from a producing well.
Primary Term – The initial period of time in an oil & gas lease to develop the property.
Producing Well - A well that is actively producing oil and/or gas.
Pugh Clause – A clause added to an oil lease designed to limit the holding of certain acreage for non-producing lands or depths beyond the initial primary term of a lease. Also called a Freestone rider.
Purchase and Sale Agreement (PSA); similarly, Letter of Intent (LOI) - A contract between a mineral owner and a mineral buyer which defines that terms of purchase, including a description of the minerals, the offer price (or price per acre), and the amount of time allowed for due diligence (title research) and funding.
Ratification - The action of signing or giving formal consent to a treaty, contract, or agreement, making it officially valid. A Non-Participating Royalty Owner, in order to receive their share of royalty from production, will have to sign a ratification agreeing to the terms and conditions in a particular oil and gas lease originally executed by the mineral owner for the mineral interest the NPRI is attached to.
Revenue Check - A check mailed to the mineral owner (usually monthly) for the applicable share of revenue, net taxes, after the sale of production from an oil and gas well.
Royalty - A contractual arrangement within a lease which defines the fractional share of revenue to be paid to the mineral owner if/when there are producing wells. Also defined as funds received by the royalty owner, minus taxes, from the sale of the production of oil and gas.
Royalty Deed - A legal document (conveyance), which declares the transfer of ownership of specific oil and gas royalty rights. This document is executed, notarized, and recorded in the local county courthouse whenever the royalties being sold or transferred are located.
Saltwater Disposal Well - A well into which oilfield saltwater is disposed of.
Severance Tax - A state or municipal tax on oil and gas products levied at the wellhead for the removal of the hydrocarbons. Also called Production Tax.
Shut-in Royalty - Payment to royalty owners under the terms of a mineral lease which allows the lessee to defer production from a well capable of producing in paying quantities but shut-in for lack of a market or marketing facilities.
Surface Owner - A party who owns the surface rights of a specific property, but not the mineral rights at or below his property.
Surface Rights - Rights typical of a landowner including building a dwelling, farming, raising livestock, etc. Surface rights do not include mineral rights and must make certain allowances to the mineral right's operator to access and transport the minerals.
Unit - The combination of leased land with adjacent leased areas by an operator, performed either because of state regulation or because of an operational consideration. Once unitized, the mineral owner's division of interest is calculated by dividing their net mineral acres by the unit acreage and multiplying it by their royalty percentage.
Working Interest Owner (Operated and Non-Operated) – A Working Interest Owner is usually the party that purchased the Lease from the mineral owner and is commonly know as the operator or driller. Other parties can also be Working Interest Owners and NOT be the operator. These parties share in the cost associated with the drilling and producing of a well and they also share in the revenue received from the sale of the production.
It's recess time! That's all for today, folks!
If you need more help or have further questions, schedule a time to talk or fill out the form below and we'll be in touch.
Thanks for reading the VOG Blog!