How Does Revenue From Mineral Rights Work?

You know that investing in mineral rights can be a lucrative venture, but how does revenue from this investment class actually work? Revenue from these investments typically comes from leasing the rights to exploration companies, who pay royalties based on the quantity of minerals extracted and sold. This income can vary significantly depending on factors such as mineral type, market demand, and the terms of the lease agreement. By having a full understanding of the dynamics of mineral rights revenue, investors can better assess potential returns and risks and make more informed and profitable investment decisions.

Calculating Net Revenue Interest

Net revenue interest, or NRI, is the allocation of interest in an oil and gas lease that a
leaseholder will be paid. As a mineral owner, is important to understand NRI and how it is calculated because it is directly tied to the revenue you receive. The formula for calculating NRI is as follows:

So, what do each of these components mean? Let’s take a look at each one individually.

Net Mineral Acre (NMA): The number of NMA you own determines your total percentage of ownership out of a tract’s gross acres. In other words, it refers to the number of mineral acres in a given tract that you own.

Unit Size: States regulate the number and location of wells that can be drilled on a given amount of acreage and into any given common source of supply. A drilling unit is used to define an area that covers one or multiple sections, in which all mineral owners defined within will be ‘forced pooled’ to participate in their share of revenue derived from the oil and gas production. For instance, if you own a 64-acre tract within a 640-acre section, you own 10% of the section.

Allocation: The percentage of oil and gas production revenue allocated to each section in a drilling unit. The amount allocated is determined by the operator. Depending on how the well is drilled, it may not extend across the full length of the drilling unit. If the minerals being produced are concentrated more heavily in one area of the drilling unit, the allocation for that area will likely be higher.

Royalty Interest: The percentage of revenue retained by the mineral owner for all future revenue from the sale of natural resources in the lease. There are many variations, but standard royalty interest rates are generally 12.5% (1/8), 18.75% (3/16), 20% (1/5), and 25% (1/4). In the state of Oklahoma, the operator cannot offer lower than the state minimum of 12.5%. The royalty percentage is negotiated in the terms of the lease made with the operator.

Example

Say that we decide to acquire this 64 net mineral acre (NMA) tract in Oklahoma’s Anadarko basin:

This section, which we will call Section A, is part of a dual section lateral. A dual section lateral is a drilling unit that consists of two 640-acre sections. In this example, the 64 mineral acres we have acquired are located in the first 640-acre section, but aren’t directly in the area where the well has been drilled. Because of Oklahoma’s forced pooling laws, mineral owners in this drilling unit cannot be excluded even if they are not precisely in the area that is being produced.

Even though the well stops before reaching the southernmost section of this drilling unit, owners in Section B will still be paid. The operator files an allocation, which dictates how much oil and gas is allocated for both sections. Due to the well stopping short in Section B, 60% is allocated to Section A and 40% is allocated to Section B.

An 18% royalty interest was negotiated in the lease, meaning that for all oil and gas produced they will receive 18% of the revenue. To calculate the royalty percentage for the overall unit, use the following formula:

Since we own 64 mineral acres out of 640 total acres in the unit, we own 10%. Multiplying this by our royalty percentage, 18%, we come to 1.8% royalty interest for the entire unit.

Referring back to the previous formula for calculating NRI, we can plug in the values for NMA (64 acres), unit size (640 acres), allocation (60%), and royalty percentage (18%).

Your NRI is 1.08%.

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