Mineral rights

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Mineral Rights are property rights to exploit an area for the minerals it harbors. Mineral rights can be separate from property ownership.

Mineral estate[edit]

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.

Severability[edit]

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. Mineral rights do include hydrocarbon resources such as oil and natural gas, which are technically not minerals, because a mineral is formally a naturally occurring crystalline "solid". But nonetheless, legal regimes typically lump them together under this one term. 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[edit]

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
  4. The right to receive delay rentals[1]
  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[edit]

The four major stages for mineral rights leasing are:

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

Ownership[edit]

There are three distinct but related aspects of ownership. They are:[2]

  • Legal description
  • Net mineral acres
  • Ownership type

Leasing[edit]

To bring oil and gas reserves to market, minerals are leased by oil companies through a legally binding contract known as a lease. This arrangement between individual mineral owners and oil companies began prior to 1900[clarification needed] 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.[3]

The division order[edit]

A division order is a binding contract between a mineral rights lessee, which is usually an oil or gas company, and the lessor, which is usually the owner of a mineral interest. 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 lessor and the lessee. Some common basic terms that are typically be decided on are:

  • 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.

[4] [5] [6]

Royalty check[edit]

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:

  • 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

Revenue interest decimal = (A÷U) × R × P × Y

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.

[7]

See also[edit]

References[edit]


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