Texas mineral rights glossary

The words on a Texas division order, royalty statement and oil and gas lease, from abstract to working interest, each explained in a few plain sentences.

Abstract and survey

Texas land is described by original land grants rather than by the township and range grid used in most other states. Each grant is a survey with a name, and each survey in a county carries an abstract number. A description such as the John Smith Survey, Abstract 123, Karnes County is how a tract is placed on the ground.

Ad valorem tax

A property tax based on value, charged by counties, school districts and other local taxing units. Producing mineral interests in Texas are taxed this way, on a value the county appraisal district sets each year. It is separate from the severance tax the state charges on production.

Affidavit of heirship

A sworn statement, filed in the county deed records, that identifies a person who died, the family history and the heirs. It is often used to move inherited minerals into the heirs’ names without going to court. It is evidence rather than a court judgment, and each payor decides whether to accept it.

API number

The unique number given to a drilled wellbore under the American Petroleum Institute’s system. A Texas well begins with 42, the state code, then a three-digit county code and a five-digit well number, as in 42-255-12345. A permitted well that has not been drilled may not have one yet.

Appraisal district

The county office that appraises property for all the taxing units in that county and mails the notices of appraised value. It keeps the mineral accounts, which are normally appraised for it by a specialist firm. Its records list mineral accounts by owner name, which is why a name on the roll is one way to find minerals nobody told you about.

Appraisal roll

The list of taxable property, its owners and its appraised values for one county and one year, produced by the county appraisal district. Producing mineral interests appear on it as separate accounts. The chief appraiser certifies the roll to the taxing units each summer, and values can move between the preliminary and the certified version.

Bonus

A one-time payment made to the mineral owner for signing a lease, usually quoted as an amount per acre of minerals leased. It is paid whether or not a well is ever drilled. For income tax it is generally treated as lease income rather than as royalty, which is a question for an accountant.

Certified roll

The appraisal roll after the chief appraiser has certified it to the taxing units, which happens in the summer. Values on a certified roll are the ones the tax bills are calculated from. A certified value can still change afterwards through a correction or a late-filed protest.

Check stub

The detail that comes with a royalty payment, showing each well, the product, the volume, the price, the gross value, your decimal, the deductions and the taxes. It is the record of what you were paid and why. Stubs are what an accountant needs at tax time and what an owner needs to compare one month against another.

Completion report (W-2 / G-1)

The Railroad Commission forms an operator files after a well is completed, reporting the test results and how the well was built. Form W-2 is used for an oil well and Form G-1 for a gas well. A completion report is usually the first public sign that a well may be about to produce.

Conveyance

Any transfer of an interest in land from one owner to another, by deed, by assignment or by court order. A conveyance recorded with the county clerk is what puts the rest of the world on notice of it. Changes in mineral ownership appear there before they appear anywhere else.

Decimal interest

Your share of production written as a decimal, which is what a division order states and what a payment is computed from. It is your acreage’s share of the unit, multiplied by the royalty fraction in the lease, multiplied by the part of the minerals you own. Decimals are normally carried to six, seven or eight places.

Deductions (post-production costs)

Amounts a payor subtracts before computing your share, typically for gathering, compression, dehydration, treating, processing and transportation. Whether they may be taken out of your royalty depends on the wording of your lease and on Texas case law reading that wording. A deduction appearing on a stub is not by itself proof that it is proper or that it is improper.

Deed

The written instrument that transfers an interest in land, including a mineral or royalty interest, and that is filed in the county deed records. The words of the deed decide what moved and what was held back. A mineral deed and a royalty deed can look alike and do different things.

Delay rental

A payment that keeps a lease alive during the primary term while no well is being drilled. Most modern Texas leases are paid up, meaning the bonus covers the whole primary term and no delay rentals are due. An older lease may still call for them, and a missed payment could end it.

Depth severance

A division of the mineral estate by depth, so that one owner or one lease holds the shallow formations and another holds the deeper ones. It can be created by a deed or by a lease clause that releases depths. Two different operators can hold rights under the same acreage at different depths.

Division order

A form the operator or purchaser of a well sends to each owner it intends to pay, stating the decimal share of production it believes that owner holds. Signing one confirms your decimal, your name and address, and your taxpayer number. In Texas a division order does not amend the lease, and the lease governs where the two disagree.

Drilling permit (W-1)

The Railroad Commission form an operator files for permission to drill, deepen, re-enter or recomplete a well. It names the operator, the lease, the well number, the county and the proposed location. An approved permit is an application that was granted rather than a well, and many permits are never drilled.

Escheat (unclaimed property)

The process by which money a holder cannot deliver to its owner is reported and turned over to the state. In Texas the Comptroller runs the unclaimed property program, and mineral proceeds are one of the largest categories in it. Money held by the state stays claimable by the owner or the owner’s heirs, with no deadline to come forward.

Estate of / heirs

Words an appraisal roll or an operator’s records use when the person they last knew of has died and the account has not been changed since. An account in the name of an estate is usually still payable, but the payor will want proof of who inherited it. Finding a parent’s or a grandparent’s name on the roll is a common way people discover minerals they own.

Executive right

The right to sign an oil and gas lease covering a mineral interest, which can be owned apart from the right to be paid. Whoever holds it chooses the lessee, the bonus and the royalty fraction. Texas law places duties on the holder toward the owners who do not hold it, and the reach of those duties has been litigated many times.

Farmout

An agreement in which the holder of a lease lets another company drill on it in exchange for an interest, usually keeping an overriding royalty. It is a deal between companies and does not change the royalty a mineral owner is due. The name on your payment can change after one.

Habendum clause

The sentence in a lease that sets how long it lasts, traditionally reading for a term of years and as long thereafter as oil or gas is produced. It is the clause that creates the primary term and the secondary term. When somebody asks whether a lease is still alive, this is the clause they are reading.

Held by production

A lease that has run past its primary term and stays in force because a well on it, or on a unit it is pooled into, is producing in paying quantities. The lease’s own habendum clause states the test. A lease can be held this way for decades with no new drilling on your own tract.

Lease name and lease number

The name an operator gives a lease, such as Smith Unit, and the number the Railroad Commission assigns to it. Oil leases and gas wells are numbered in separate series, and a lease number is unique only within its Commission district and its oil or gas designation. Both appear in the Commission’s records and on most royalty statements.

Life estate

An interest that lasts for one person’s lifetime, after which it passes to the remainderman named in the deed or the will. On a tax roll a life estate often appears under the life tenant’s name. How royalty income is divided between a life tenant and a remainderman in Texas turns on rules a lawyer applies to the particular deed.

Mineral interest

Ownership of the oil, gas and other minerals under a tract of land, which in Texas may be owned separately from the surface. It carries the right to explore, to lease and to be paid for production. A mineral interest is real property and passes by deed, will or inheritance like any other land.

Net revenue interest

The share of production an owner actually receives after the royalty and any other burdens on the lease have been taken out. For a royalty owner it is the decimal printed on the division order and on the check stub. It is smaller than the fraction a mineral deed describes, because the lease and the unit each divide it.

Non-participating royalty interest

A royalty carved out of the mineral estate and owned separately, whose holder shares in production but has no right to lease, no right to bonus and no right to delay rentals. It is created by a deed or by a reservation written into a deed. A holder of one is paid when a well produces and is never asked to sign a lease.

Operator

The company the Railroad Commission recognizes as responsible for a lease or a well, named on the P-4. It drills, produces, files the reports and is the company an owner calls about a well. The operator is not always the company that sends the checks.

Overriding royalty interest

A royalty carved out of the working interest rather than out of the mineral estate, often reserved by a geologist, a landman or a broker. It is paid in the same way a lease royalty is paid. It lives and dies with the lease it was carved from, so it ends when that lease ends.

P-4 (certificate of compliance)

The Railroad Commission form that names who operates a lease and authorizes production from it to be moved and sold. A new P-4 is how a change of operator becomes official in the Commission’s records. A new company name on your lease usually means a P-4 was approved.

Payout

The point at which a well’s revenue has repaid what the working interest spent to drill and complete it. Some interests, such as a back-in after payout, begin to be paid only once it is reached. It affects working interest owners far more often than it affects royalty owners.

Plugging report

The Railroad Commission form, W-3, that an operator files after a well is plugged and abandoned. It records how the wellbore was sealed and when. A plugged well produces nothing, which matters if it was the only well holding a lease.

Pooling

Combining tracts or leases into one unit so that a single well can be drilled and everyone in the unit shares production by acreage. Pooling in Texas is normally voluntary and comes from a pooling clause in the lease. Once a tract is pooled, a well anywhere in the unit pays it, and its share is its acreage divided by the unit’s acreage.

Preliminary roll

An appraisal roll that has not been certified yet, so its values may still move. Notices of appraised value are mailed from it in the spring. A search that shows a preliminary value is showing the district’s current estimate rather than a final number.

Primary term

The fixed number of years a lease runs whether or not anything is drilled, stated at the front of the habendum clause. Three and five years are both common in Texas, and your own lease is the authority for yours. If nothing holds the lease when the primary term runs out, the lease ends.

Probate

The court process that proves a will, or determines the heirs of somebody who left none. Texas offers several routes, including probating a will as a muniment of title, which is often used when an estate is mostly land and minerals. Which route fits a particular estate is a question for a Texas probate attorney.

Pugh clause

A lease clause that releases the acreage outside a producing unit when the primary term ends, so that production on one unit does not hold the whole lease. A depth Pugh clause does the same for formations below or above the one being produced. Whether a lease has one, and what it releases, is written in the lease itself.

Purchaser

The company that buys the oil or gas at the wellhead, and which often pays the royalty owners directly. For oil, a first purchaser is the party Texas law makes responsible for remitting the production tax; for gas the tax is the producer’s, though a purchaser commonly withholds and remits it. Your payment may come from a purchaser rather than from the operator.

Right of way

An easement that lets a pipeline, a road or a power line cross a tract. It is negotiated with the surface owner, and payment for it goes to the surface owner rather than to the mineral owner. A pipeline crossing your land does not by itself say anything about who owns the minerals under it.

Royalty interest

A share of production free of the cost of drilling and operating, reserved by the mineral owner when the minerals are leased. It is usually written as a fraction of production, such as one eighth or one fifth. What may be subtracted from it before you are paid depends on the words of your lease.

Secondary term

The part of a lease’s life after the primary term, which continues only while the lease’s own saving clauses are satisfied. Production in paying quantities is the usual one. Shut-in payments, continuous operations clauses and force majeure clauses can also carry a lease into or through it.

Severance tax

The tax Texas charges on oil and gas when it is produced, collected by the Comptroller and shown as a deduction on royalty statements. The Comptroller publishes the current rates, which are 4.6 percent of market value for oil and 7.5 percent for gas. Some wells qualify for statutory exemptions or reduced rates, and the Comptroller’s site is where those are listed.

Shut-in royalty

A payment a lessee makes to keep a lease alive when a well capable of production is not producing or selling. It works only if the lease contains a shut-in clause, and only within the time and the amount that clause states. A missed or late shut-in payment is one of the ways an old lease can end.

Shut-in well

A well that is capable of producing but is closed in, often because there is no pipeline connection or because prices or repairs made producing uneconomic. A shut-in well produces nothing and pays no royalty. Whether it still holds a lease depends on that lease’s shut-in clause.

Spacing

The Railroad Commission’s rules on how far a well must sit from lease lines and from other wells, and how many wells an area may hold. Statewide Rule 37 covers distance and Statewide Rule 38 covers density, and many fields have their own field rules in place of them. An operator that cannot meet a spacing rule applies to the Commission for an exception.

Surface estate

Ownership of the surface of a tract, without the minerals underneath when the two have been severed. In Texas the mineral estate is dominant, which means the mineral owner or its lessee may use as much of the surface as is reasonably necessary to produce the minerals. Surface use agreements are where surface owners and operators usually settle what that looks like in practice.

Suspense

Money a payor owes an owner but is holding rather than paying out. A title question, an unsigned division order, a returned check or an address that no longer works will each put an account into suspense. Held money stays on the payor’s books until the problem clears, and after the dormancy period the Texas Property Code sets it is reported and delivered to the Texas Comptroller.

Term royalty

A royalty interest granted for a fixed number of years and as long thereafter as there is production, after which it reverts to whoever granted it. It is created by deed rather than by lease. A term royalty that has expired pays nothing, and the payments return to the holder of the reversion.

Unit

A defined area, made up of one or more tracts, that a well is drilled to serve and whose owners share production by acreage. A unit is created by a designation of unit, normally filed with the county clerk in the deed records, while the operator separately files an acreage designation with the Railroad Commission for the well. Your share of a unit is your acreage in it divided by the unit’s total acreage, then adjusted by your royalty fraction and by how much of the minerals you own.

Unitization

Combining several separately owned tracts or leases into one operating unit, most often to run a secondary or enhanced recovery project across a whole field. It is broader than ordinary pooling and usually needs agreement from a large majority of the interests. The Railroad Commission approves field-wide units for some recovery projects.

Working interest

The interest that carries the right to drill and operate and the obligation to pay its share of the cost of drilling, completing and operating a well. The operator and its partners hold it. A royalty owner pays none of those costs and holds no working interest.