How does one calculate fractional ownership interest in oil and gas leases?

Answer 1

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.