In order to start earning mineral royalty payments, you must first acquire mineral rights. When looking at your options, you may be able to purchase mineral rights as a part of a larger property transaction or simply as a standalone asset.
When mineral rights have been separated from their surfaced rights, the orphaned subsurface can be considered “split” or “severed.” In this article, we will outline everything you need to know about severed mineral rights in the United States.
What is Severance?
In the vernacular of today, severance is most commonly used to describe “severance pay” or “severance packages” in which an employee continues to receive paychecks after the dismissal from an employer. But don’t worry, you’re not getting fired, we’re here to teach you about mineral rights.
The term severance can be defined simply as the act of ending a connection or relationship. Severance can be used to describe the end of a relationship, or in this case, the separation of a property into two different owners.
Fee Simple Estates
A fee simple estate is the highest level of property ownership in the United States. Fee simple estates are also commonly referred to as “unified estates” or “unified tenure.” Those that purchase their property in a fee simple estate acquire the land’s surface, subsurface, water rights, buildings, and other features.
A severed estate, also known as a “split estate,” is a property that has been divided amongst multiple owners. In this sense, the land has been “severed” or “split” to best use its resources to fit the needs of separate parties.
Severed estates are very common in mineral rights and water rights transactions in which local regulations prevent new owners from acquiring shared resources. Existing fee simple owners can also sever their estate at any point in order to sell off their mineral rights.
Severed Mineral Rights
Severed mineral rights exist independently of surface property owners. When in possession of severed mineral rights, individuals and companies are typically allowed to perform any reasonable action in order to explore and extract minerals from the property. With this, severed estate owners must work in conjunction to find the best solution.
After the severance of a deed, a separate mineral deed is created to accommodate the new property owner. The new deed can outline full or partial ownership of the property’s mineral rights, depending on the conditions of the contract.
Fragmented Mineral Rights
If split-estate mineral rights are divided among multiple owners, it would be a bit redundant to refer to them as “severed severed” mineral rights. Instead, mineral rights divided among multiple parties are called fragmented mineral rights.
With oil fields and fossil beds taking up massive amounts of space below the surface of the earth, mineral rights can be split among an essentially infinite number of separate owners.
What is Severance Tax?
Although they share the common root term of “sever,” severance tax is not applied at the time when severed estates are established. No, instead, severance tax actually gets its name for when natural, non-renewable resources are “severed” from the earth.
What this means is that severance tax is applied at the time of mineral extraction, rather than when an estate is split. All national and state severance taxes are unavoidable, whether or not the operation ends up turning a profit.
Who pays severance tax for minerals?
At the time of extraction, severance tax is applied to the energy production company as well as any individuals or entities that hold mineral interests in the operation. Most commonly, severance tax is applied to crude oil, natural gas, and coal operations.
Severance tax is highly variable at rates for different materials and different parts of the country. Today, nearly all of the states that produce oil or gas have applied some sort of severance tax for operations within the state borders.
What is the severance tax on oil?
In 2021, the current national average severance tax on oil and gas is typically around 5 to 6% of the production’s gross value. Many states have tiered severance taxes that apply different rates for operations of varied magnitude. Severance taxes are paid directly to local governing bodies.
Throughout the country, severance tax may be referred to by a few different terms, the most common of which is “production value tax.”
In conclusion, it is very easy to get terms confused when considering severed estates and severance taxes paid on active mineral rights. We hope that this article has helped define these terms and provided information on ways in which severance works in the realm of mineral rights and oil and gas royalties.