Royalty

The royalty clause specifies the share of proceeds from production reserved to the lessor in exchange for leasing his/her minerals to the lessee. You may see it written as a percentage or as a fraction. In newer memoranda of oil and gas leases, you may not see it listed at all (although, of course, it would still be specified on the unrecorded lease).

Royalties are calculated free of expenses of production. This means that the lessor doesn’t bear any expenses relating to the costs of drilling the well or producing oil and/or gas. However, they may or may not be free from post-production costs, such as costs to treat the oil and/or gas to make it marketable or costs to transport it to market.
When post-production costs are deducted from the royalty owner’s portion prior to distribution, this is referred to as a net royalty. When they are not deducted prior to distributing the royalty owner’s portion, it is referred to as a gross royalty. When negotiating with a landowner or reporting on the lease of record in an ownership report, it is important to be able to distinguish between the two.
​
I also want to mention, that in some leases, an addendum may be included at the end of the lease that replaces the royalty percentage listed in the body of the lease with that listed in the addendum. Always be thorough and look through the entire document when reviewing a lease (as well as any other document in title).