One of the most frequently used terms or phrases in the oil and gas industries is mineral interest. Sometimes it’s used interchangeably with mineral rights. But what does it really mean?
While the mere definition of mineral rights is pretty basic, the term’s meanings and implications go far beyond. Understanding mineral interest and what it comprises can help understand the rights and duties of the parties involved, especially the ones with the mineral interest.
For this article, the focus will be on mineral interest in oil and gas, as this term is also used for other minerals underground, such as gold or other metals.
Mineral Interest Definition
Mineral interest refers to the economic interest in the minerals near or underneath the surface of the land. It essentially dictates the mineral ownership rights as to who the minerals in a piece of land belong to.
Simply speaking, any party with a mineral interest for land or offshore field has the right to extract, produce, and sell the minerals present. In the case of oil and gas, minerals include all kinds of hydrocarbons found underneath, including crude oil and natural gas.
In most cases related to oil and gas fields, there are multiple interests. Each party has a specific interest, and the kind of interest dictates what rights or obligations they have. For instance, some parties with a mineral interest will have to pay mineral rights royalties because they have leased or bought the mineral interest from another party.
This is the de facto definition of mineral interest in the US, but it may vary for different regions and countries. In the US, the land is usually divided into two kinds of ownership, surface, and mineral. Surface ownership gives the party ownership of the actual land, whereas mineral ownership/rights give the party the ownership of what’s underground.
So just because the land is under someone’s name doesn’t guarantee that they also own the minerals, unless, of course, the deed or lease specifically says so.
Mineral Interest and Mineral Ownership
While mineral interest refers to mineral ownership, it may not indicate absolute ownership of minerals. If an oil or gas company owns the land and its mineral rights, then they have an absolute mineral interest, i.e., 100 percent ownership.
However, in most cases, mineral interest gives ownership for the duration of the lease or agreement. The actual owners give up the rights to the company with the mineral interest in exchange for mineral rights royalties.
As mentioned above, mineral interest is often used interchangeably with mineral rights because the party with the mineral interest has mineral rights. But what do these rights entail, and to what extent do they cover ownership?
Here’s what you should know:
- The right to drill, extract and produce any kind of hydrocarbons underneath to the extend of the depth included in mineral interest (depth rights)
- To use as much land/surface as needed to extract and produce the hydrocarbons
- To implement any conveyances of mineral rights, i.e., sell or transfer mineral rights to another party
- The right to transport and sell the produced hydrocarbons
- To hire other contractors to work on the field for the purpose of extraction
- The right to delay rentals or royalties in case of non-production
Of course, the exact terms of the rights can vary from contract to contract. Generally speaking, all these rights are usually covered. In exchange for these rights, the mineral interest party pays rights to the owners of the land, who originally also had mineral rights.
Who Can Get Mineral Interest?
In the oil and gas industry, it’s usually the exploration, drilling, and production companies that buy or lease mineral interest in a land. These may be separate entities, one company, or several subsidies of a company.
In many cases, the mineral interest is distributed between several parties, especially when companies need investment from third-party. This is why mineral rights also include the right of conveyance, so a part of the mineral interest, and by extension, mineral rights can be transferred in another entity’s name.
The documentation that defines the terms of the mineral interest and royalty interest can be incredibly complicated. Special law firms that specialize in oil and gas royalties play a major role in the development of the terms and the documents. For all parties involved, it’s necessary to understand the extent of the interest and clear mention of who owns what and till when.
As such, anyone can lease or buy mineral interest for a property from the owners. But mostly, it’s investors from the oil industries or companies with the equipment and personnel for extraction that go for mineral interest.
How Long Does Mineral Interest Last?
Usually, a mineral interest lasts indefinitely. It may be transferred or sold to another entity.
Also, the mineral interest may be considered abandoned if there hasn’t been any production or claim for 20 years. The owner will then have to claim the minerals to regain mineral rights.
That said, it all comes down to the exact agreement terms as well as state laws. So each case may be different. Also, the interest is contingent on the fulfillment of the obligations. These may include following state/federal laws, paying royalties, and paying severance tax as well as other taxes.
Any violation of laws or conflict may result in legal action against the party with the mineral interest.
Only the party with the mineral interest can produce crude oil or gas. The US is one of the very few countries where mineral interest and mineral rights can belong to individuals and companies. In many countries, mineral rights belong to the state.
In short, the entity with the mineral interest extracts and produces the minerals. They have the right to transfer or sell mineral rights. In exchange, they usually pay royalties to the owners, often based on production levels and mineral prices.
Before purchasing mineral rights (mineral interest), it’s imperative to check whether the mineral rights even belong to the entity selling them.