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

Ownership of mineral rights (more properly "mineral interest") is an estate in real property. Technically it is known as a mineral estate, although often referred to as mineral rights. It is the right of the owner to exploit, mine, and/or produce any or all of the minerals lying below the surface of the property.

The mineral estate of the land includes all organic and inorganic substances that form a part of the soil. Exceptions include sand, gravel, limestone, and subsurface water—which are normally considered part of the surface estate.

Mineral interests can be found across the entire United States. The most common states known for oil and gas production include Texas, Oklahoma, North Dakota, California and New Mexico. Texas, being one of the highest producers of oil and gas, accounts for nearly a third of both crude oil and natural gas reserves in the United States. The Eagle Ford Shale and Permian Basin in Texas are the leaders in overall production of oil and gas. Therefore, mineral rights are common in these areas.

The Eagle Ford Shale extends into 24 counties. Due to the large amount of brittle carbonate in the Eagle Ford Shale, hydraulic fracking combined with horizontal drilling is the most common technique used during production. As a result, the Eagle Ford Shale is one of the largest producers of mineral rights. The Permian Basin is a “stacked play” with mineral formations spanning the Yates, San Andres, and Clear Fork.[1]

Severability

Mineral estates are sometimes severed from the surface estate. Such severance is accomplished with a conveyance or reservation of these rights. This conveyance or reservation includes minerals or substances considered minerals. Although technically not minerals, which are naturally occurring crystalline "solids," legal regimes typically include hydrocarbon resources such as oil and natural gas under the term "mineral rights." Such a conveyance or reservation includes royalties, bonuses and rentals. In the absence of such a conveyance, the surface owner retains the rights.

Major elements

The five elements of a mineral right are:

  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[2]
  4. The right to receive delay rentals[3]
  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 mineral right owners to sever and sell oil and gas royalties, while keeping the other mineral rights. In such case, if the oil lease expires, the royalty owner has nothing and the mineral owner still owns the minerals.

Mineral rights leasing

The four major stages for 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:[4]

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.[5]

The division order

A division order is a binding contract between a mineral rights lessee, which is usually an oil or gas company, and the purchaser of oil and/or gas extracted from the property. The purpose of the division order is to show a schedule of how the mineral revenues are divided up between the oil company and the owners of the mineral rights. The division order is a contract that must be negotiated by the purchaser and the lessee. Some common basic terms that are typically decided on are:

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.

[6] [7]

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:[8]

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.

See also

References

  1. ↑ http://royaltyclearinghouse.com/types-of-mineral-rights-ownership/sell-oil-and-gas-mineral-rights
  2. ↑ http://marcellusmineralowners.com/oil-and-gas-lease-bonus/
  3. ↑ http://www.glossary.oilfield.slb.com/Terms/d/delay_rental.aspx
  4. ↑ Stafford, Jim (1981). Look Before You Lease. Roar Press. p. 31.
  5. ↑ Wagner, Bret. "Introduction to Mineral Rights Leasing". Mineral Rights Coach. Bret Wagner. Retrieved 30 December 2012.
  6. ↑ http://sansabaroyalty.com/mineral-rights-information/division-order/
  7. ↑ http://www.mineralweb.com/owners-guide/leased-but-not-producing/division-order/
  8. ↑ "Understanding Operator Royalty Checks". Caddo Minerals. Retrieved 6 May 2016.
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