Bonus vs. Royalty: The Two Numbers That Actually Matter

An oil and gas lease usually involves two separate payments, and landowners tend to focus on the wrong one.

Bonus per acre

This is the upfront cash payment, quoted as dollars per net mineral acre. It varies significantly by county, by section, by how active drilling is nearby, and by how many companies are competing for leases in the area. A landman's first offer is rarely their best offer.

Royalty rate

This is the ongoing percentage of the value of oil and gas actually produced and sold from a well on your minerals. Historically, 1/8 (12.5%) was standard. In today's market, royalties of 3/16 (18.75%) to 1/4 (25%) or higher are common and negotiable. This single number can be worth far more over the life of a well than the bonus payment — don't let a bigger upfront check distract you from a weak royalty.

The fine print that quietly changes what your royalty is worth

• Post-production cost deductions. Many leases let the company deduct the cost of gathering, transporting, treating, and marketing the oil and gas before calculating your royalty — which can shrink your check by a significant percentage. A "cost-free" or "gross proceeds" royalty clause prevents this.
• Shut-in royalty. Covers situations where a well is capable of producing but isn't actually selling gas. Without clear shut-in language, you could go years without payment on a producing well.
• Primary term and extensions. The length of time the company has to begin drilling — typically three to five years — before the lease expires. Watch for extension options that let the company unilaterally extend that term for an additional payment, without your further consent.

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