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How does one calculate fractional ownership interest in oil and gas leases?
Wiki User
∙ 11y ago
First, one most know how much land is owned by them in an established unit where the well is drilled. For illustration let's say one owns 20 acres of a 160 acre unit. Next through negotiations on the original oil lease we will know what percent of the production will go to the owner as royalty commonly expressed as 1/5 (a fifth),1/4 ( a quarter) or less, etc. Let's assume in this example the negotiated amount was 1/5.
20 acres over a 160 acre unit equals .125 times .20 (1/5) eguals .025 which will be the fractional ownership interest assuming that the 20 acres is 100% theirs.
Taking that .025 fractional owner interest times whatever that production sells for during a specific time period ( usually a month) will be what the owner will receive minus severance taxes. If the well produces 10000 barrels of crude valued and sold at $100. per barrel there will be $1,000,000 in sells times the .025 (fractional ownership interest = $25000 minus a severance tax going to this particular owner.
Wiki User
∙ 11y ago
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