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3 types of ownership interest for oil and gas properties

On Behalf of | Aug 22, 2023 | Oil & Gas Law

The oil and gas industry has multiple ways to account for properties used for various purposes. Defining their ownership interests is crucial, especially for taxpayers who could own numerous types of interests for one plot of land. These details could affect the number of tax properties they legally have.

Landowners could set clear terms and divisions using the following ownership interest types:

  • Tract or Parcel: Landowners could account for their interest based on separate land tracts or parcels. Multiple units could fall under one lease, depending on the circumstances. However, they might not be one property despite having a single lease. Grouping multiple parcels or tracts of land could rely on their positions. Combining them as one property might be possible only if they share common sides. If not, they could be separate properties even if they have the same owner.
  • Separate deposits: Multiple mineral deposits on the same parcel or tract of land are typically separate. Some conditions allow the interests of these deposits to exist as a single property for accounting purposes. However, they must be separate if elected to do so.
  • Unitization: Multiple landowners can combine their properties for efficient development of reservoirs. It is a common practice, with some states using a single unitization agreement for several properties.

Still, the most appropriate way of approaching ownership interests and rights could vary, depending on the land’s purpose, owners and relevant accounting regulations.

Determining ownership for proper accounting

The oil and gas industry could have complex regulations, especially regarding accounting and tax-related obligations. One property could involve multiple entities, including owners and lessees, with various incomes or expenses within a single operation. Knowing and defining interest ownership could help determine the most appropriate accounting method and how to conduct necessary transactions.