Minerals 101

A plain-English guide to mineral rights, royalties and leasing for Texas and New Mexico owners

Whether you inherited minerals, found an old deed in a family file, or just started getting royalty checks, this guide explains what you own, how it pays, how to find and protect it, and what it's worth. It's written by a Midland, Texas mineral buyer with more than 23 years of experience in Permian Basin title.

1. What are mineral rights?

Mineral rights are the ownership of the oil, gas and other minerals beneath a tract of land, along with the right to lease, develop, sell or pass them to heirs. Land in Texas is really two estates: the surface estate (the land you can walk on) and the mineral estate (what lies below).

The two start out owned together, but any owner can split them. When a deed sells the land but "reserves" the minerals, or sells only the minerals, the estates are severed. From then on each has its own chain of title. That's why so many Texas families own minerals under land they've never seen, and why buying a ranch doesn't necessarily mean you own what's under it.

The mineral estate is "dominant"

In Texas the mineral estate is legally dominant. The mineral owner, or the oil company holding their lease, may make reasonable use of the surface to develop the minerals: build roads and pads, drill wells, lay pipelines. Texas courts temper this with the accommodation doctrine. If the surface owner has an existing use and the operator has a reasonable alternative, the operator may have to accommodate the surface use. Surface owners are usually paid damages under a surface use agreement, but they don't share in royalty unless they also own minerals.

Which minerals are included?

"Oil, gas and other minerals" clearly covers oil, natural gas, condensate and natural gas liquids. Texas courts have generally held that near-surface substances like sand, gravel, limestone and water belong to the surface owner unless the deed says otherwise. Lignite, uranium and other materials depend on the deed wording and how they're mined. When in doubt, the exact words of the deed control.

2. A short history of Texas mineral ownership

Every private land title in Texas traces back to a grant from the sovereign that held the land at the time: Spain, Mexico, the Republic of Texas, or the State of Texas.

Early grants kept the minerals. Under Spanish and Mexican law, a land grant did not include the mines and minerals unless the grant specifically said so. The Republic of Texas adopted the same rule, and it continued after statehood. Land granted before 1866 came without the minerals unless they were expressly included.

1866: minerals go to the landowner. The Texas Constitution of 1866 released the state's interest in minerals to the owners of the soil. The 1869 and 1876 constitutions carried that provision forward. It applied retroactively, so landowners received full ownership of the minerals under land granted before 1876. Since then, a grant from the state has been presumed to include the minerals unless they are expressly reserved.

After 1895: the state keeps some. Beginning in 1895, much of the remaining public domain was sold with the state retaining the minerals. Under the Relinquishment Act of 1919, the surface owner of those lands acts as the state's agent for leasing, and the surface owner and the state share the bonus and royalty. Other state lands, such as Permanent School Fund and University Lands acreage, were never sold and are leased for minerals by state boards.

How the 1/8 royalty became the standard. Mineral owners rarely drill their own wells. Instead, they lease to an operator who pays all the costs of development. For decades the standard lease gave the mineral owner a 1/8 royalty, free of drilling and operating costs, and the operator kept the other 7/8. That history is why net royalty acres are still measured on a 1/8 basis today. State land boards raised their standard royalty to 1/6 in the 1950s and early 1960s. Today royalties are negotiated, and 3/16, 1/5 and 1/4 are common in the Permian Basin.

Source: adapted from "Mineral Rights and Royalties," Handbook of Texas Online, Texas State Historical Association.

3. Types of mineral interests

"Mineral rights" is a catch-all phrase. Owners actually hold one or more specific interests, each with different rights, income and risk. How yours was created, whether by deed, will, lease or court order, decides which one you have.

Mineral interest (MI)

Full ownership of the minerals, usually described as a fraction ("an undivided 1/4 mineral interest") or as net mineral acres. A mineral interest normally carries five rights: to develop the minerals, to lease them (the executive right), to receive lease bonus, to receive delay rentals, and to receive royalty. Fractions shrink with each generation. A 1/4 interest left to four children becomes 1/16 each.

Executive right and non-executive mineral interest

The executive right, the power to sign oil and gas leases, can be separated from the rest of the mineral interest. Someone who owns minerals but not the executive right holds a non-executive mineral interest (NEMI). They share in bonus and royalty but can't negotiate the lease. Under Texas law, the executive owes non-executive owners a duty of utmost good faith when leasing.

Royalty interest (RI)

A share of production, or the money from it, free of the costs of drilling and producing. A mineral owner who leases keeps a lessor's royalty, typically 1/8 to 1/4. Royalty pays only while there's production. It doesn't include bonus or the right to lease.

Non-participating royalty interest (NPRI)

A royalty carved out of the mineral estate, usually reserved in a deed. The NPRI owner receives royalty but doesn't participate in leasing, bonus or delay rentals. The wording matters enormously:

• A fixed NPRI is a set share of production (for example, 1/16 of all production), no matter what royalty the lease provides.
• A floating NPRI is a share of whatever royalty is negotiated (for example, 1/2 of the royalty), so it rises when the lease royalty rises.

Older Texas deeds often use "double fraction" language like "1/2 of 1/8." Texas courts have increasingly read that as a floating share, because 1/8 was once the customary royalty. These questions turn on the exact deed wording and are a common reason decimals on new wells get reviewed.

Term royalty

A royalty that lasts for a set period ("for 20 years and as long thereafter as oil or gas is produced"). When the term ends, the interest reverts to the mineral owner.

Overriding royalty interest (ORRI)

A royalty carved out of the lessee's working interest rather than out of the minerals. Landmen, geologists and lease brokers often receive overrides as compensation. An ORRI is tied to the lease it was carved from and ends when that lease ends, unless it contains anti-washout protection.

Working interest (WI)

The operating rights under a lease: the right to explore, drill and produce. Working interest owners pay their share of all costs (drilling, completion, operating and eventually plugging) and receive the revenue left after royalties. Working interest has the most upside and the most risk, and it's the only interest that can lose money.

Non-operated working interest

A working interest in a well run by someone else. The owner pays their share of costs through joint interest billings and receives their share of revenue, with no say in daily operations.

Leasehold interest

A working interest in a lease that hasn't been drilled yet. Leasehold is often bought and resold to operators assembling drilling units.

Net profits interest (NPI)

A contractual share of a property's net profits after costs. It's uncommon for individual owners.

Surface rights

Ownership of the surface only. Surface owners may receive damages, easement payments and water sales, but no royalty unless they also own minerals.

4. Oil and gas leases

An oil and gas lease isn't a rental. It's a conveyance of the right to explore and produce, in exchange for money up front and a share of production. Lease forms look similar, but small wording differences can mean large differences in your checks.

Key lease terms

• Bonus: a one-time, per-acre payment for signing. Bonus in active parts of the Permian has ranged from a few hundred to several thousand dollars per net mineral acre, depending on location and timing.
• Primary term: the initial period (often 3 to 5 years) the operator has to start drilling or the lease expires.
• Secondary term / "held by production" (HBP): once a well produces in paying quantities, the lease continues as long as production does.
• Royalty rate: your share of production, commonly 1/8 (12.5%), 3/16 (18.75%), 1/5 (20%), 2/9 or 1/4 (25%).
• Post-production costs: whether the operator may deduct gathering, compression, processing and transportation before calculating your royalty. A "no deductions" clause can be worth as much as a higher royalty rate, but Texas courts read these clauses very literally, so the drafting matters.
• Pugh clause: releases acreage or depths not included in a producing unit, so one well can't hold your whole tract.
• Depth clause: releases depths below (or above) the producing formation at the end of the term.
• Shut-in royalty: a small payment that keeps the lease alive while a capable gas well isn't producing.
• Pooling clause: lets the operator combine your tract with others into a drilling unit. Look for limits on unit size and shape.
• Continuous development clause: requires ongoing drilling to keep undeveloped acreage.

5. Units, pooling and horizontal wells

Modern Permian wells are drilled horizontally, often 2 to 3 miles long, crossing several tracts owned by different people. Production has to be shared fairly among everyone whose minerals the well drains.

Pooled units

A pooled unit combines several tracts into one drilling unit. Each tract shares in production in proportion to its acreage in the unit. In Texas, pooling almost always happens through the pooling clause in your lease. Texas has a compulsory pooling statute (the Mineral Interest Pooling Act), but it's rarely used, unlike forced pooling in Oklahoma and New Mexico.

Allocation and production sharing agreement (PSA) wells

When leases don't allow pooling across lease lines, Texas operators drill allocation wells or PSA wells. Production is usually split by how many feet of the horizontal lateral run under each tract, instead of by acreage. Your decimal can therefore differ from well to well, even in the same section.

Units and your royalty acres

When several wells share the same unit, your interest is figured against that unit once. If you own 0.005 in a 640-acre unit with eight wells, you have 0.005 × 640 × 8 = 25.6 net royalty acres in that unit, not 25.6 per well. Adding up NRA well by well in the same unit overstates what you own, and it's one of the most common valuation mistakes.

6. Net mineral acres, net royalty acres and decimal interest

These three numbers describe the same ownership in different ways. Buyers, operators and appraisal districts each tend to use a different one.

Your mineral fraction comes from your deeds, wills and probate records. Your lease royalty comes from your lease. The unit size appears on the well's drilling permit (Form W-1) and the unit plat. For allocation wells, the operator's allocation factor replaces the simple acreage ratio.

7. How to read a royalty statement

Each month your operator or its payor sends a check stub or statement covering every well you're paid on. Layouts vary, but they contain the same pieces:

• Property / well name and number: identifies the well or lease. Match it to the Railroad Commission's records to check production.
• Production date: the month the oil or gas was sold. In Texas, payment usually trails production by about two to three months.
• Product code: oil, gas, condensate, NGLs (plant products), and sometimes separate residue gas lines.
• Interest type: RI (royalty), OR or ORRI (overriding royalty), WI (working interest).
• Owner decimal: your share of the well. It should match your division order.
• Gross volume and price: total barrels or Mcf sold from the well and the price received. Compare prices to WTI and Henry Hub for the same month.
• Gross value: volume × price for the whole well.
• Severance and production taxes: Texas taxes oil at 4.6% and gas at 7.5% of market value. These are taken from your share.
• Deductions: gathering, compression, processing, transportation and marketing, if your lease allows them.
• Owner net value: what you're actually paid. It equals gross value × your decimal, minus your share of taxes and allowed deductions.

8. Division orders

A division order is a statement from the operator listing each owner's decimal interest in a well, which you sign to confirm the decimal for payment. You'll get one when a new well starts producing, or when ownership changes because of a sale, inheritance or new title work.

What Texas law says

• A Texas payor can require a signed division order before paying you. Many will hold your money until it's signed and you've returned a W-9.
• Under the Texas Natural Resources Code, a division order can't change the terms of your lease. The lease controls.
• Payments are generally due within 120 days after the end of the month of first sale. After that, oil is generally due within 60 days and gas within 90 days after the end of the month of sale. Late payments generally earn interest unless there's a title dispute or a missing division order.
• Payors may hold small amounts until they reach a minimum, then pay annually or when the threshold is met.

Before you sign

1. Check the well and legal description. Is this land you own?
2. Check the decimal. Run the math in section 6, or use our calculator.
3. Check the interest type. It should be RI if you're a mineral or royalty owner.
4. Sign, attach a W-9, and keep a copy.

If the decimal looks wrong, don't just refuse to sign. Write to the operator's division order department, explain why, and ask for their title opinion figures. Common causes are a probate that wasn't recorded, an old NPRI, or a tract that only partly falls in the unit.

9. How to find your mineral rights

Most people start with a name, a county, and maybe an old check stub. Here's how to work out what you own.

Step 1: Find the legal description

A Texas legal description isn't a street address. Outside of towns it usually names the county, survey, abstract number, block and section, for example "Section 12, Block 33, T&P RR Co. Survey, A-1234, Howard County, Texas." You can find it on:

• Deeds, wills and probate records in the family files
• Oil and gas leases, division orders and check stubs
• County appraisal district (CAD) mineral accounts
• County clerk real property records, searchable by name in most counties

Step 2: Check the tax rolls

In Texas, producing minerals are taxed by the county appraisal district, so if you own producing royalty there's usually a mineral account in your name. Search the county tax rolls at MineralHolders.com to see producing interests by owner name.

Step 3: Find it on the map

Use the Railroad Commission of Texas GIS Viewer to locate the survey and section, see existing wells, and view permitted locations. Then search RRC drilling permits (Form W-1) for the unit size and acreage behind each well. In New Mexico, the Oil Conservation Division offers a similar map.

Step 4: Look for new activity

Search RRC drilling permits (Form W-1) by county and lease name for new wells, unit sizes and operators. New permits near your tract are a strong signal of future income and higher value.

Step 5: Keep records

Keep a simple spreadsheet with each tract, your fraction, every well and operator, owner numbers, decimals, and copies of deeds, leases, division orders and one recent stub per operator. Your heirs will thank you.

10. Unclaimed royalties

When an operator can't find or pay an owner, the money eventually goes to the state as unclaimed property. Common reasons include an outdated address, a death with no probate, an unsigned division order, or a title problem. In Texas, unpaid mineral proceeds are generally presumed abandoned after 3 years and turned over to the Comptroller.

• Search ClaimItTexas.gov under every family name and old address. Oil and gas entries often show the operator's name as the holder.
• Also search the states where the owner lived and where the operator is incorporated (often Delaware or Oklahoma), and the multistate site MissingMoney.com.
• Heirs can claim with proof of their relationship, such as a probate order or a recorded affidavit of heirship.

After you claim, contact the current operator to get into "pay status" so future royalties come straight to you.

11. Inheriting and transferring mineral rights

Minerals change hands through death, divorce, gifts, trusts and sales. The process is the same in every case:

1. Create the right document: a deed, a probate order, an affidavit of heirship, or a divorce decree.
2. Record it with the county clerk in every county where the minerals are located.
3. Notify each operator with a copy of the recorded document so they can update their records and send new division orders.

After a death in Texas

• With a will: the will is usually probated. Texas also allows "probate as a muniment of title," a faster, lower-cost option when there are no unpaid debts other than mortgages.
• Without a will: heirs typically use a court determination of heirship or a recorded affidavit of heirship, signed by disinterested witnesses who knew the family. Many operators accept a recorded affidavit, especially for smaller interests.
• Out-of-state estates: if the will was probated in another state, Texas usually requires an ancillary probate or recording of the foreign probate in the county where the minerals are.

Expect anywhere from a few weeks to several months before operators release suspended royalties to heirs.

Divorce, trusts and gifts

Record the divorce decree, or a mineral deed made under it, in each county. To move minerals into a trust, the trustee must actually receive a recorded deed. A trust that's never "funded" with a deed doesn't hold the minerals. Gifts to children or grandchildren during life can simplify an estate, but talk to your CPA about gift tax and cost basis first.

12. Taxes on minerals and royalties

• Property (ad valorem) tax: Texas appraisal districts value producing minerals each year, and you'll get a tax bill from the county, school district and others. Interests with a total taxable value under $500 are generally exempt.
• Severance tax: 4.6% of oil value and 7.5% of gas value, withheld by the operator.
• Federal income tax: royalties are ordinary income, reported on Form 1099-MISC. Royalty owners can usually take a depletion deduction, often 15% of gross royalty income under percentage depletion, within IRS limits.
• Selling: a sale of minerals you've held more than a year is generally taxed as a long-term capital gain, not ordinary income. Inherited minerals usually receive a "stepped-up" basis equal to their value at the date of death. Mineral interests are real property in Texas and can qualify for a 1031 like-kind exchange into other real estate.

We're not tax advisors. Talk to a CPA about your situation before you lease or sell.

13. What makes mineral rights valuable?

There's no single price per acre for mineral rights. Two owners in the same county can get very different offers. Buyers look at:

• Location and geology: the Permian Basin's stacked pay zones (Wolfcamp, Spraberry and others) make it among the most valuable acreage in the country, but value still varies section by section.
• Producing or non-producing: producing minerals are valued mostly on current and expected royalty income. Non-producing minerals are valued on how likely and how soon drilling is.
• Development activity: new permits, rigs nearby and an active, well-financed operator add value.
• Remaining inventory: undrilled benches and well locations still to come under your tract.
• Lease terms: a higher royalty and fewer deductions mean bigger checks.
• Production decline: horizontal wells produce the most in their first year or two, then decline steeply. A buyer prices the curve ahead, not last month's check.
• Commodity prices: oil and gas prices, and the futures market.
• Title: clean, recorded ownership closes faster and is worth more than an interest needing probate or curative work.

14. Hold, lease or sell?

Many owners split the difference and sell part of their interest. That locks in cash while keeping some upside.

15. How to sell your mineral rights

1. Gather what you have. A check stub, division order, lease, deed or tax statement is enough to start. Upload your documents securely.
2. Get an evaluation. We confirm ownership, review production, lease terms and nearby activity, and prepare a written offer. There's no cost and no obligation.
3. Review the offer. Ask questions, compare offers, and talk to your attorney or CPA.
4. Title review. We examine the county records and handle any curative work, such as affidavits of heirship.
5. Close. You sign a mineral deed, and you're paid at closing. We record the deed and notify the operators.

How to protect yourself with any buyer

• Never pay a fee to receive an offer or an appraisal.
• Read exactly what the deed conveys: all minerals or royalty only, all depths or certain formations, all wells or specific ones.
• Watch for a "sweeper" clause that conveys every interest you own in the county, not just the tract you discussed.
• Be wary of drafts that aren't paid until after a long title period. Know when and how you'll be paid.
• Get offers in writing and compare them on the same interest.

16. Glossary of mineral terms

Abstract

A number assigned to an original land survey in a Texas county, used in legal descriptions.

Affidavit of heirship

A recorded sworn statement identifying a deceased owner's heirs, often used instead of probate for minerals.

Allocation well

A horizontal well crossing several tracts, with production allocated among them, usually by lateral length.

Bbl

A barrel of oil, 42 U.S. gallons.

Bonus

The up-front, per-acre payment for signing an oil and gas lease.

CAD

County appraisal district, the agency that values producing minerals for property tax.

Completion

The work, including fracking, that makes a drilled well ready to produce.

Decimal interest (DOI)

An owner's share of a well's production, shown on division orders and check stubs.

Decline curve

The rate at which a well's production falls over time.

Division order

The operator's statement of each owner's decimal, signed to confirm payment.

DUC

"Drilled but uncompleted," a well that's drilled but not yet fracked or producing.

Executive right

The right to sign oil and gas leases on a mineral interest.

Held by production (HBP)

A lease kept alive past its primary term by producing wells.

Lateral

The horizontal section of a well, often 1 to 3 miles long in the Permian Basin.

Lessee / lessor

The oil company taking a lease (lessee) and the mineral owner granting it (lessor).

Mcf

One thousand cubic feet of natural gas.

Mineral deed

The document that conveys mineral ownership from one owner to another.

Net mineral acres (NMA)

Gross acres multiplied by your fractional mineral ownership.

Net royalty acres (NRA)

Royalty ownership standardized to a 1/8 royalty. One NRA equals one NMA leased at 1/8.

NPRI

Non-participating royalty interest: royalty without leasing or bonus rights.

Operator

The company that drills and runs a well and usually pays the owners.

ORRI

Overriding royalty interest, carved from a lease's working interest.

Pay status

When an operator has your current ownership and address and is sending your royalties.

Permian Basin

The oil-producing region of West Texas and southeastern New Mexico, including the Midland and Delaware Basins.

Pooling / unit

Combining tracts into one drilling unit that shares production by acreage.

Pugh clause

A lease clause releasing acreage or depths outside a producing unit.

Royalty

The mineral owner's cost-free share of production under a lease.

RRC

Railroad Commission of Texas, the state's oil and gas regulator.

Severance

Separating the mineral estate from the surface estate in a deed.

Severance tax

The state tax on oil and gas when produced, 4.6% for oil and 7.5% for gas in Texas.

Spud

To begin drilling a well.

Suspense

Royalties held by the operator until an ownership or paperwork issue is resolved.

Title opinion

An attorney's written opinion of who owns a tract and in what shares, used to set decimals.

W-1

The Texas permit application to drill a well, showing location, lease and unit acreage.

Working interest

The cost-bearing right to drill and produce under a lease.

17. Frequently asked questions

This guide is general information about Texas mineral ownership and isn't legal, tax or investment advice. Laws, prices and tax rules change, and every title is different. Talk to a qualified attorney or CPA about your situation.