By Shannon Olney, Esq.
If you own oil and gas rights under a tract of land, you may receive an offer from someone wishing to lease those rights. This offer will often come from a company who is interested in drilling for oil or natural gas. This party is called the Lessee. In your lease offer, you will see several different numbers. Two of these numbers are the "bonus" and the "royalty."
A bonus payment is a set amount of money that you will receive for agreeing to lease your mineral rights. It is similar to a signing bonus for an employment contract. If you sign the lease, the Lessee agrees to give you a sum of money as consideration for the use of those rights. If your lease includes an extension provision, the offer may include an additional bonus payment to be paid when the primary term of the lease expires. In that case, the company will pay another bonus to extend the lease for an additional term.
A royalty payment is a fraction or percentage of the minerals produced from the land that is shared with the mineral owner. A royalty payment can be taken in kind (an actual quantity of oil or gas), but it is more commonly an amount of money equivalent to the value of the oil or gas. Receiving a royalty payment depends on many factors including the costs of drilling and production of the well. If oil or gas is never successfully extracted from the land, or if it is not extracted in significant quantities, you may never receive a royalty payment. If a well is very successful, you may receive a significant amount in royalty payments.
It is important to pay attention to these numbers and make sure you consider them to be adequate compensation for the use of your mineral rights. Sometimes these numbers can be negotiated so that you will receive more compensation than what you saw in the initial lease offer.