Mineral rights

Mineral rights are property rights to exploit an area for the minerals it harbors. Mineral rights can be separate from property ownership (see Split estate).

Mineral estate

Owning mineral rights (often referred to as a "mineral interest" or a "mineral estate") gives the owner the right to exploit, mine, and/or produce any or all minerals they own. Minerals can refer to oil, gas, coal, metal ores, stones, sands, or salts. An owner of mineral rights may sell, lease, or donate those minerals to any person or company as they see fit. Mineral interests can be owned by private landowners, private companies, or federal, state or local governments.

Severability

Mineral estates can be severed, or separated, from surface estates. There are two main avenues to mineral rights severance: the surface property may be sold and the minerals retained, or the minerals may be sold and the surface property retained, though the former is more common [1]. When mineral rights have been severed from the surface rights (or property rights), it is referred to as a "split estate." In a split estate, the owner of the mineral rights has the right to develop those minerals, regardless of who owns the surface rights because in United States law, mineral rights trump surface rights (see Oil and gas law in the United States). This can create tension between mineral rights owners and surface rights owners if the surface rights owners do not want to allow the mineral rights owners to use their property to access their minerals. Often, companies will offer a surface rights owner a surface use agreement, which can provide financial compensation to the surface owner, or more commonly, offer some concessions on how the minerals are accessed. For example, some surface use agreements require the company to access the property from specific roads or points on the property.

Major elements

The five elements of a mineral right are:[2]

  1. The right to use as much of the surface as is reasonably necessary to access the minerals
  2. The right to further convey rights
  3. The right to receive bonus consideration[3]
  4. The right to receive delay rentals[4]
  5. The right to receive royalties

The owner of a mineral interest may separately convey any or all of the above-listed interests. Minerals may be possessed as a life estate, which does not permit a person to sell them, but merely that they own the minerals so long as they live. After this, the rights revert to a predesignated entity, such as a specific organization or person.

It is possible for a mineral right owner to sever and sell an oil and gas royalty interest, while keeping the other mineral rights. In such case, if the oil lease expires, the royalty interest is extinguished, its purchaser has nothing, and the mineral owner still owns the minerals.

Mineral rights leasing

An owner of mineral rights may choose to lease those mineral rights to a company for development at any point. Signing a lease signals that both parties agree to the terms laid out in the lease. Lease terms typically include a price to be paid to the mineral rights owner for the minerals to be extracted, and a set of circumstances under which those minerals are to be extracted. For instance, a mineral rights owner might request that the company minimize any noise and light pollution when extracting the minerals. Leases are usually term-limited, meaning the company has a limited amount of time to develop the resources; if they do not begin development within that time-frame they forfeit their right to extract those minerals.

The four components of mineral rights leasing are:

  1. Ownership
  2. Leasing
  3. The Division Order
  4. The Royalty Check

Ownership

There are three distinct but related aspects of ownership. They are:[5]

  • Legal description
  • Net mineral acres
  • Ownership type

Leasing

To bring oil and gas reserves to market, minerals are conveyed for a specified time to oil companies through a legally binding contract known as a lease. This arrangement between individual mineral owners and oil companies began prior to 1900 and still thrives today. Before exploration can begin, the mineral owner (lessor) and the oil company (lessee) must agree to certain terms regarding the rights, privileges and obligations of the respective parties during the exploration and possible production stages.

Although there are numerous other important details, the basic structure of the lease is straightforward: in exchange for an up-front lease bonus payment, plus a royalty percentage of the value of any production, the mineral owner grants the oil company the right to drill for a period of time, known as the primary term. If the term of the oil or gas lease extends beyond the primary term, and a well was not drilled, then the Lessee is required to pay the lessor a delay rental. This delay rental could be $1 or more per acre. In some cases, no drilling occurs and the lease simply expires.

The duration of the lease may be extended when drilling or production starts. This enters into the period of time known as the secondary term, which applies for as long as oil and gas is produced in paying quantities.[6]

The division order

A division order is not a contract. It is a stipulation for agreement as to what the Operator of a well or an oil and/or gas purchaser will disburse in terms of revenue to the mineral owner. The purpose of the division order is to show how the mineral revenues are divided up between the oil company,the owners of the mineral rights (royalty owners) and the overriding royalty interest owners. The Division Order needs a signature, a current address and social security number for individual royalty owners or tax identification number for companies.

Oil and gas lease

An oil and gas lease is a contract because it contains consideration, consent, legal tangible items and competency.

  • The term of the lease. Usually there is a primary term and a secondary term. Each term has conditions set up either by the lessor or lessee to fulfill.
  • The royalty rate. This is how the rates are divided and how it is calculated from the revenues produced from the mineral rights.
  • If the lessor receives a bonus
  • If there is a delay rental agreement—any delay in production by the lessee for a negotiated period, the lessee can pay the lessor a negotiated amount of money per year to keep the contract active
  • If there is a "shut-in royalty" agreement—royalties are paid at a negotiated rate per acre, only while the well is not producing oil or gas

Many other line items can be negotiated by the time the contract is complete. When all parties come to an agreement the division order states how much revenue goes to each party involved.[7][8]

Royalty check

Mineral owners may receive a monthly royalty check if oil, gas, or any other substances of value are extracted from below the surface and either sold or used by an oil and gas operating company. The royalty paid is a function of the net value of the proceeds from the sale of the oil, gas, or other substance, multiplied by the owner's revenue interest decimal, less any amounts deducted for taxes or other deductions.

The revenue decimal used to calculate the amount of an owner's royalty check is calculated with the following equation:[9]

  • A = Net Mineral Acres owned
  • U = Number of Mineral Acres in the oil and gas drilling unit or pool
  • R = The Royalty assigned to the mineral right owner by the oil and gas lease covering his or her minerals
  • P = Participation Factor assigned to the tracts owned by the mineral owner as described in a unit agreement
  • Y = Additional Ownership Factor assigned to the owner's mineral rights by any other arrangement or agreement
  • D = Deductions

Revenue interest decimal

It is common for royalty checks to fluctuate between pay periods due to monthly changes in oil or gas prices, or changes in the volumes produced by the associated oil or gas wells. Additionally, royalties may cease altogether if the associated wells quit producing marketable quantities of oil or gas, if the operating company has changed hands and the new operator has not yet established a new payment account for the owner, or if the operating company or product purchaser is missing appropriate paperwork or proper documentation of changes in ownership or contact information.[10]

Surface Use Agreement

A surface use agreement (SUA) is a contract between a property owner and a mineral rights holder that dictates how the mineral rights are to be developed [11]. Meaning, when mineral rights are extracted by a company that does not own the property above where the minerals are located, the company has the legal right to extract those minerals regardless. However, companies will often enter into voluntary negotiations with the surface rights owner to ensure that the operations all go smoothly. In such cases, the company will offer a SUA, in which property owners may ask for financial compensation or other concessions regarding how the minerals are extracted. See sample [12].

See also

Poem

"Some say they're stuck in purgatory but more likely hell. Because they don't know enough facts to decide if Jones has a valid well."

References

  1. ↑ Fambrough, J., 2009. Minerals, surface rights and royalty payments. Real Estate Center, Texas A&M University, Technical Report 840
  2. ↑ "Mineral Rights 101 - Infinity Resources". www.infinityresourcesco.com.
  3. ↑ "Oil and Gas Lease Bonus". marcellusmineralowners.com. 17 July 2014.
  4. ↑ "delay rental - Schlumberger Oilfield Glossary". www.glossary.oilfield.slb.com.
  5. ↑ Stafford, Jim (1981). Look Before You Lease. Roar Press. p. 31.
  6. ↑ Wagner, Bret. "Introduction to Mineral Rights Leasing". Mineral Rights Coach. Bret Wagner. Retrieved 30 December 2012.
  7. ↑ "Lease & Division Orders - San Saba". sansabaroyalty.com.
  8. ↑ "Division Order – Understanding Oil and Gas Division Orders". www.mineralweb.com.
  9. ↑ "Understanding Operator Royalty Checks". Caddo Minerals. Retrieved 6 May 2016.
  10. ↑ "Oil and Gas Royalty Calculators". Royal Mesa Minerals. Retrieved 22 Mar 2017.
  11. ↑ "Surface Use Agreements: What They Are and How To Get One - Texas Agriculture Law". agrilife.org. 20 January 2015.
  12. ↑ "Texas Sample Oil & Gas Lease and Surface Use Agreement - Earthworks". earthworksaction.org.


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