How to make the most out of your mineral rights: Leasing versus selling
Joe Wilson is CEO of Infinity Resource Group, Inc., a professional mineral rights consulting firm in Parkersburg, W.Va., and a Registered Landman. David Pearl is managing director of a CNG patent holding company and president of a CNG fuel island development company. Your questions are welcomed by calling 412-535-9200 or by e-mailing joe@irg-energy.com.
Owners of mineral rights often ask us which option is better: Should they lease or should they sell their mineral rights? Mineral rights refer to the ownership of oil and gas (and other minerals) located underneath the surface of real property. If you need immediate cash, with no strings attached, it is probably best to sell your mineral rights. You get paid in full at time of closing and, subject to taxes, the money is yours to do with as you wish. If, however, you are willing to take some risk and try to make as much money as you can, then leasing your mineral rights may be your preferred option.
Leasing is where you continue to own the mineral rights, but you grant the investor the right to extract the minerals (gas and oil) over a period of time, typically five years with an option to renew for another five years. You would typically get a lesser amount of up-front cash than if you sold the mineral rights and the gas company has the right to drill for gas and oil during the lease term. There are many variables in determining up-front cash or 鈥渓ease bonus money鈥� including man made infrastructure (such as accessibility to pipelines), geological findings, or even investor opinions as to the potential of finding oil and gas on the property. Unlike an apartment lease, where a tenant pays the landlord rent each month, in a mineral rights lease the up-front cash pays for the entire lease term in most cases. So if the lease calls for a nominal payment, usually paid per acre of minerals owned, the price will be set per acre for the entire lease term and is usually paid in full in a single payment at the beginning of the lease term. This type of lease is called a 鈥減aid up lease,鈥� so there are no monthly payments due thereafter, until the gas company actually extracts the gas. If the gas company fails to extract gas during the initial term, then the lease will generally end, with the mineral rights owner getting paid the up-front rent, and nothing more. However once the well is producing gas, the gas company will then pay the mineral rights owner a percentage of the gas production. These payments are called 鈥渞oyalties.鈥� It is important that the mineral rights owner gets the right advice when signing a lease with a gas company, because if the gas company fails to produce gas, then the mineral rights owner has taken his rights off the market for the lease term and could be losing considerable income during that time.
That蘑菇视频 why we often get landowners more than just a nominal rent and we investigate the well operator to see if he is solvent and likely capable to meet expected production schedules. The worse thing that can happen is if the landowner enters into a lease with a gas company, which then goes out of business, and the owner has wasted a lot of time waiting for the gas extraction which never materializes. If you are not risk tolerant, then it may be better to sell your mineral rights, so you get guaranteed income.
We recently had a situation where the mineral rights owners were an elderly couple and their health was steadily declining. They needed immediate cash to pay for unexpected medical bills. After evaluating their options they decided to sell their mineral rights, and they were pleased to be able to get top dollar, payable in one check at the settlement table.
Whether you decide to sell or lease your mineral rights, the amount of money you receive is negotiated up front, and stated clearly in the sale or lease documents. A title search must be completed before any purchase or lease transaction can be consummated. Oftentimes landowners think they own or have the right to lease mineral rights when in fact those rights may have been transferred years ago by a prior landowner. Often times a title search will uncover a prior lease on a property which can cause landowners to lose thousands or even millions of dollars in lease bonus monies or royalties. Many of these leases may be 20 or more years old, but remain in full effect. These 鈥渙ld鈥� leases could most likely make it impossible for the current Landowner to receive any additional 鈥渓ease bonus monies鈥� until the 鈥渙ld鈥� lease has been cleared up. Many of the properties that have active old leases have shallow producing oil and gas wells. As long as there is any production on the property, no matter how trivial, the lessee may maintain control over the rights to the detriment of the mineral rights owner.
Once it is established through a title search that you own your mineral rights, and you decide to lease the rights, you still have the option to sell the rights. Obviously once you sell the rights, you cannot lease them. One strategy that we advise clients to consider is to enter into a lease first, and when the well becomes productive, or is close to becoming productive, sell the rights. This strategy eliminates some of the risk to prospective mineral rights buyers because the earlier risks associated with constructing the well is removed, thus potentially making the mineral rights more valuable.
In determining whether a landowner owns valuable mineral rights, it is advisable to seek professional advice from a mineral rights consultant for an evaluation of the mineral rights. Before making any decision regarding the disposition of your mineral rights, it is always advisable to consult your lawyer and tax advisor.