How to make the most out of your mineral rights: The basics
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.
Back in the old days, when folks bought land, they never gave much thought to what was under or above it. Land was commonly bought or conveyed as 鈥渇ee simple,鈥� meaning the fee (which comes from the words fief or fiefdom) gave the owner absolute ownership of the land going down as deep as the center of the earth and as high as the heavens. Ah, the good ole鈥� days!
With the discovery of oil and gas (鈥渕inerals鈥�), and fracking technology to recover these minerals, land in certain areas has become extremely valuable. And landowners are cashing in. Investors, well drillers, oil and gas companies are preparing the way to extract these valuable resources by laying pipelines, acquiring land to build drill pads, and leasing or buying the rights to these minerals (鈥渕ineral rights鈥�) from property owners owning those mineral rights located within the well fields. Typically a well field requires 640 to 1600 acres. If you are lucky enough to own land within the well field area, you could be due a lot of money. But if your property falls outside the well field boundary line, your mineral rights could have little value.
When it comes to the construction of a well pad, you can expect to see a pipeline close by. There is no point in building a well pad if you can鈥檛 transport the gas from the well to the market.
This is where it will make most sense for landowners to work proactively with the pipeline companies to help arrange the capabilities to send all that valuable gas direct to the market. So easements and right of ways are obtained by pipeline companies from the landowners.
An easement is where a landowner grants the pipeline company the right to use a designated strip of land to lay the pipe; the pipeline company guarantees that it will not disturb the ownership interests of the landowner except for that area of land needed for the pipe. Pipeline companies typically pay landowners a one-time price for the easement and right of way. It is the responsibility of the pipeline company to maintain and repair the pipeline at no cost to the landowner; the landowner must give the pipeline company access, or a 鈥渞ight of way,鈥� for routine maintenance and repairs.
Pipeline routes and drill pads generally go hand in hand, but not always. One pad can range from 5-15 acres, but the field upon which gas is drawn is typically hundreds, if not thousands of acres. Landowners who are lucky enough to own property within the gas field have the option of selling or leasing their mineral rights to the gas companies or investors that work with the gas companies.
When the landowner sells or leases mineral rights, the landowner retains ownership and use of the surface rights. So the landowner can continue to live, farm or hunt on the land surface.
Selling mineral rights means that the landowner sells all or some of the minerals found beneath the land surface for a one-time payment due at settlement. Leasing mineral rights generally means that the landowner continues to own the mineral rights, but for a limited period of time the gas company can extract the minerals, and the landowner will receive a percentage of profits, based upon prevailing market rates at the time the gas or oil is extracted.
Sometimes the landowner also gets paid a lump sum at the beginning of the lease; this is an example of a 鈥淧aid Up鈥� Oil and Gas Lease. Landowners can also CASH IN those mineral rights by selling their rights to investors making big profits.
Selling mineral rights is guaranteed money for the landowner because the landowner is paid at time of settlement. While leasing mineral rights may give the landowner some cash at settlement, the mineral rights owner is sharing the risk with the gas company or investors in the hopes of getting paid much more money, known as royalties, during the term of the lease in consideration for taking less money up-front.
However there is the risk that the landowner may not earn any royalties from the lease. These risks include the amount of minerals that can be extracted from the well, the price of the minerals at the time it reaches the market and other business risks such as natural geological issues that cannot be detected until wells are drilled.
If the driller is successful, and market conditions are good, the payback or royalties to the mineral rights owner for leasing could be much higher than if the owner sold his or her rights.
Of course, the tax ramifications differ depending on whether you sell or lease your mineral rights.
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 adviser.