CPL Mineral Rights & Royalty Calculations 3 — Questions and Answers
Question 1: Under a 640-acre pooled unit, a tract of 80 acres is included. If the unit well produces $100,000 net revenue per month, what is the tract's proportionate share before royalty?
- $12,500 (Correct answer)
- $25,000
- $6,250
- $50,000
Correct answer: $12,500
80/640 = 1/8 tract participation; $100,000 × 1/8 = $12,500.
Question 2: A lease grants a 1/8 royalty. The lessor later conveys a 1/32 NPRI to a third party. What royalty does the lessor now effectively retain?
- 1/8
- 3/32 (Correct answer)
- 1/32
- 1/16
Correct answer: 3/32
Lessor's royalty remains 1/8 (4/32), but 1/32 is burdened to the NPRI, so lessor nets 4/32 − 1/32 = 3/32.
Question 3: Which of the following best describes the 'market value' royalty calculation method?
- Royalty is based on actual proceeds received by the lessee
- Royalty is based on the prevailing market price at the wellhead regardless of contract price (Correct answer)
- Royalty is based on net profits after operating costs
- Royalty is based on the posted price set by the state
Correct answer: Royalty is based on the prevailing market price at the wellhead regardless of contract price
Under the market value method, royalty is calculated using the market price at the point of valuation, not necessarily the price the lessee actually received.
Question 4: A 'Pugh clause' in an oil and gas lease primarily serves to:
- Prevent the lessee from assigning the lease without consent
- Release acreage outside a pooled unit from the lease at end of primary term (Correct answer)
- Require the lessee to drill offset wells
- Set a minimum royalty payment amount
Correct answer: Release acreage outside a pooled unit from the lease at end of primary term
A Pugh clause (or 'freestone rider') releases non-pooled acreage — and in a vertical Pugh clause, non-producing depths — from the lease when pooling holds only part of the tract.
Question 5: Royalty interest is classified as which type of property interest?
- Personal property
- Real property (Correct answer)
- Chattel real
- License
Correct answer: Real property
Royalty interests are real property interests running with the land, not personal property.
Question 6: An operator sells gas at the wellhead for $2.50/Mcf. The same gas has a market value of $3.00/Mcf at the wellhead. Under a 'market value' royalty clause with a 1/4 royalty, the royalty owner receives:
- $0.625/Mcf
- $0.75/Mcf (Correct answer)
- $0.50/Mcf
- $0.375/Mcf
Correct answer: $0.75/Mcf
Market value clause uses $3.00/Mcf; $3.00 × 1/4 = $0.75/Mcf.
Question 7: A 'shut-in royalty' clause allows an operator to keep a lease alive when:
- The well is producing but royalties are withheld
- The well is capable of production but is shut in due to lack of market (Correct answer)
- The primary term has expired without production
- The lessee has failed to pay delay rentals
Correct answer: The well is capable of production but is shut in due to lack of market
Shut-in royalty clauses allow the lessee to maintain the lease by paying a fixed shut-in payment when a gas well is capable of production but lacks a market or pipeline connection.
CPL Mineral Rights & Royalty Calculations 3
Under a 640-acre pooled unit, a tract of 80 acres is included.
If the unit well produces $100,000 net revenue per month, what is the tract's proportionate share before royalty?