The Truth About Royalties

By Staff Report | April 22, 2013

There is more to owning mineral rights than receiving a royalty check in the mail every month. The National Association of Royalty Owners calls the ownership of mineral rights an asset, and NARO recently opened a division in North Dakota to provide mineral owners with access to information and advice about handling those assets. Besides N.D., the organization also operates in the other major shale plays in the U.S., from Texas to Pennsylvania, helping families and organizations handle their royalty payments from one generation to the next. 

In only three years in the Bakken play, royalty payments and lease terms for production companies have drastically changed. In 2010, the average per-acre price for land in the Bakken was roughly $300 to $600 per acre. Today, land lease prices start at $2,000 per acre. In 2010, royalty payments equaled roughly 18 percent of gross production on each well. Today, royalties are paying out at more than 20 percent. “Most important, royalty owners are not responsible for any of the cost or risk associated with E&P (exploration and production) development or property development,” says Parker Hallam, chief operating officer of Brietling Oil and Gas Corp. But, because royalty payments are based off the gross production and not on the net, he says, “The income stream that you receive is directly tied to the commodity price. If oil goes down, so does your check.” 

Along with the fluctuating price of oil, mineral rights and royalty incomes require attention because of the simple nature of the asset: it is always depleting. But that shouldn’t stop any qualified individual from becoming a royalty owner. A person can become a royalty owner even if he or she doesn’t own mineral rights or land in the play. Breitling is one of many companies that offer people a chance to invest in oil and gas. The company offers potential investors the chance to invest in the production and drilling side of a well, or, just the royalty side. 

Investing on the drilling side does mean 100 percent of the drilling costs and liability associated with the process is part of the purchase. But, according to Hallam, with the risk comes the reward of higher royalty payments (off net production) and 100 percent tax advantage during the year the well was drilled. And 15 percent of the money earned from the production of the well is considered a depleting asset, and taxes aren’t required on that 15 percent. 

Investing on the royalty side brings zero liability and zero stake in the production of the well. The payments are based on the gross, but 15 percent of payments received still qualify as depleting assets. A person can sell a royalty just like a property and avoid capital gains taxes. “We bundle up small percentages of many different wells and acreages so you own a percentage of a very large pie,” Hallam says. "Right now it is an exciting time because we know a lot about these oil fields.”