Definitions
Royalty Interest – The right to oil and gas (minerals) in place entitling the owner to production from the property, in kind or value, free of expense for development and operation. Ownership percentage will vary.
Working Interest – The right to oil and gas (minerals) in place minus the royalty interest that is responsible for all development and operational costs of the property. Although not required, usually divided among multiple owners. May also be referred to as operating interest.
Minerals – All rights to oil and gas or solid minerals in place.
Overriding Royalty Interest – The right to oil and gas (minerals) in place entitling the owner to production from the property, in kind or value, free of expense for development and operation. Created from the working interest and is subject to the duration of the working interest.
Net Profits Interest – A fraction of the operator’s net profit, as defined in the instrument creating the interest. Most often carved out by separate assignment or as a retainage upon assignment of a working interest.
Production Payment – An agreement entitling the owner to a right for a limited period of time, or for a specified amount of money, or a specified number of units (bbls or mcf etc) to minerals in place.
Carried Interest – An agreement between two or more working interest owners where one of the working interest owners (the carrying party) agrees to pay all or a part of the development costs for one or more of the other parties to the agreement (carried party) and to recover the amount advanced on behalf of the others through future production allocated to those carried.
Lease – An agreement whereby the owner of operating rights, held by a mineral or working interest owner, assigns all or a part of such operating rights to another person or entity for a retained non-operating interest in production, cash, no cash or other type consideration.
Sublease – The retention of an ongoing interest (as an overriding royalty interest) upon the assignment of a working interest.
Lease Bonus – An advanced royalty payment (typically cash or a cash equivalent) paid for the granting of a lease for the assignment of rights to develop certain oil and gas minerals.
Farm-Out – An sharing agreement where some part of the costs of developing a mineral interest are transferred to another party and in return for taking on the defined development costs the paying party receives an interest in the mineral interest property.
Property – According to the Internal Revenue Code “each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land”
Interest – An economic interest in a mineral deposit, including those defined as a working interest, royalty, overriding royalty, net profits and certain production payments.
Depletion – The removal of oil and gas (minerals) from their in-place natural reservoir, thereby, decreasing the amount of oil and gas (minerals) available to be recovered in the future.
Cost Depletion – The recognition of the depletion of an oil and gas (minerals) reservoir asset using units of the asset produced as compared to the total available units of the reservoir asset prior to the asset production.
Percentage Depletion – An alternative method of calculating depletion, that is measured by a flat percentage, typically of gross income from a property, which can be limited to a percentage of taxable income from the property.
Depletion Recapture – Prior depletion deductions are subject to potential recapture as ordinary income when an oil, gas, geothermal or other mineral property is sold or otherwise disposed of at a gain.