NATURAL GAS ROYALTIES
The royalties paid for natural gas leases depend on a number of factors. Some of these factors are within a landowners control (such as negotiating the royalty percentage, acres of land owned, etc) and other factors are not within a landowners control (size of production unit, market price of natural gas, well production value, etc.).
Factors that impact the amount of royalty paid to a landowner from a producing natural gas well include:
- The royalty rate negotiated as part of the natural gas lease.
- The size of the production unit (spacing unit) the natural gas well will be pulling gas from.
- The amount of acres a landowner owns within the production unit (spacing unit).
- The volume of natural gas produced by the well.
- The market price for natural gas.
Each of these factors are described in more detail below.
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Royalty Rate - the royalty rate is the negotiated rate between the landowner (or landowner coalition) and the gas company. Natural gas royalty rates can vary greatly across the country and between different states and gelogic formations. Many factors come into play in determining the royalty rate including any state minimum royalty rates, age of the the gas play, natural gas infrastructure in place, gas company operating margins and expenses, production values from the gas wells, etc.
In some states like Texas and Louisiana where oil and natural gas production has a long history, the infrastructure is in place, and the the natural gas plays have been proven, royalty rates of 25% - 30% are not uncommon.
In New York State, the minimum royalty rate that a landowner can receive is 12.5% ("1/8"). Since the mid-2000's, royalty rates have been increasing from 15% - 18%. Royalty rates being seen in Pennsylvania for wells drilled in the Marcellus Shale have been reported to have gone higher than 20%.
With the natural gas production rates that are being seen in Pennsylvania for natural gas wells drilled in the Marcellus Shale, New York landowners in the Southern Tier region should expect royalty rates of at least 20%.
Acreage Owned By The Landowner In The Unit - this is the amount of acreage a landowner owns within the production unit. Just because a landowner may have leased all of their land to a gas company, not all fo the leased acreage may fall within the production unit. If this is the case, then this needs to be factored into calculating the amount of royalty that will be recieved.
Acreage in the Production Unit (Spacing Unit) - this is the amount the total acreage the natural gas well is expected to drain. The NYS Department of Environmental Conservation (DEC) refers to this as the "Spacing Unit". As per the DEC regulations, spacing units and setbacks are currently based on the specific gas pool and depth. For drilling horizontal wells in the Marcellus Shale formation, spacing units are expected to be 640 acres.
Daily Production Rate of Natural Gas - this refers to how much a natural gas well is expected to produce....measured in million cubic feet per day (mmcf). Another rate of measurement is mcf = thousand cubic feet per day.
Market Price for Natural Gas - the market price can fluctuate weekly based on supply and demand. In the mid-2000's natural gas prices spikeed up over $11.00 per mcf and are now hovering between $4.50-$5.50
It is important to note that all gas wells produce natural gas on a declining curve - that is to say that over time, as natural gas is withdrawn, the production rate will continue to decline. In some cases, such as with Trenton Black River gas wells, the production rate can decline dramatically over the course of 3-5 years. In the case of Marcellus Shale wells, based on what is currently known, the wells are anticipated to have a much longer production life, anywhere from 20-30 years or more.
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| Given the information above, landowners can estimate how much royalties they can expect to see if their property is included in a spacing unit with a natural gas well. This can be accomplished using a natural gas royalty calculator.
Penn State has an easy to use Royalty Calculator as well as other information on natural gas royalties.
Another royalty calculator can be found on Geology.com on the Royalty Estimator webpage.
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OTHER RESOURCES
Additional resources for natural gas royalties include:
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