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The Significance Of Royalty Provisions In Oil And Gas Leases

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Scott A. Storey
Foster Swift Agricultural Law Update
February 2012

Every provision of an oil and gas lease is negotiable, including the royalty to be paid to the landowner in the event of a successful well. The royalty is usually expressed as a fraction of the net revenue realized from the sale of oil and gas produced from the well. The initial lease presented to our landowner clients typically provides for a one-eighth royalty. If, however, we are successful in negotiating for a one-sixth royalty (which is the same royalty required on all leases with the State of Michigan) what difference would this small change make to a typical landowner?

If, for example, a successful well is drilled on a unit consisting of 80 acres leased from a landowner, the well produces 60 barrels of oil per day, operates 200 days per year, and the market remains at $90 per barrel, the well would generate yearly revenue of approximately $1,080,000 (60 barrels x 200 days x $90). In this example, the landowner whose lease provides for a one-eighth (.125) royalty would realize approximately $135,000 in annual revenue ($1,687.50 per acre). However, the landowner who negotiated a one-sixth (.1666) royalty would realize $180,000 in annual revenue ($2,250 per acre).

Foster Swift attorneys have the experience and expertise to assist landowners in negotiating royalty provisions as well as all other aspects of oil and gas leases and contracts.