RESOURCES
YOUR RESOURCE FOR OIL & GAS ROYALTIES
YOUR RESOURCE FOR OIL & GAS ROYALTIES
The word “mineral” is used in a variety of contexts. Generally, ores of metals, coal, oil and natural gas, gemstones, dimension stone, construction aggregate, salt and other materials extracted from the ground are considered to be minerals. However, there is no definition of “mineral” that applies in every situation, and what is considered to be a “mineral” can vary from state to state and even change over time!
The amounts of money that change hands in mineral property transactions can be huge in comparison with the average person’s financial experience. The total yield (lease + royalties) or mineral sale price can often exceed the value of the surface rights. Let’s consider two examples:
Example A: A 100-acre property is completely underlain by a coal seam that is eight feet thick. The owner agrees to let a mining company remove the coal for a royalty of $3 per ton that will be paid upon extraction. Assuming a coal recovery rate of 90%, the owner would be paid nearly $4 million.
Example B: A 100-acre property is drilled for natural gas, and the royalties will be shared by owners of a 640-acre unit that immediately surrounds the well. The property owner is to receive a 12.5% royalty based upon the wellhead value of the gas, which at the time of production is $8 per thousand cubic feet. Assuming an average well production rate of 2 million cubic feet of gas per day throughout the calendar year the property owner would be paid over $100,000 dollars for one year of gas production, making the natural gas royalties per acre extremely attractive.
Oil and natural gas transactions involve large sums of money, so average oil royalty payments can be difficult to estimate – especially in areas where very little drilling has occurred in the past or where deep rock units are being tested for the first time.
Mineral rights and mineral lease transactions involve large amounts of money and are very complex. This article is intended to be no more than a brief introduction, and reading up on oil and gas leases for dummies will simply not give you enough information (it will introduce you to the situation only). If you are contacted to lease or sell mineral rights that you own, you should promptly get advice from an attorney who has expertise in mineral transactions and the laws of your state. If you do not have an attorney, you can contact the local Bar Association for guidance.
In general, the purpose of a lease or a purchase contract is to convey the rights of exploration and production to a mineral development company. However, the owner of the surface also has some rights. Basic rights of the surface owner are provided by state laws; however, every surface owner should decide if stronger protections are needed. The only way to preserve them is to be sure that the contract contains adequate language to protect crops, livestock, buildings, personal property, access and any other desires during the duration of a lease or permanently in the case of a sale. Lessees will often accept significant revisions to what is contained in their standard lease or sales contract; however, they are under no obligation to grant your requests. They can walk away.
If you want a good financial outcome before putting your oil and gas property for sale with protection for your property during and after mineral production, it is up to you and your attorney to be sure that you have a good contract. Knowledge and negotiating skills are what will determine the success of your deal. If you don’t have these you are taking a huge risk.