Oil and Gas Rights — Mastering the Basics
What are Oil and Gas Rights?
Mineral rights enable the owner to explore and produce any minerals that exist on or beneath the surface of the earth. Oil and gas rights are a subset of mineral rights and specifically refer to the right to produce any oil or natural gas existing beneath a given property.
Mineral rights are often transferred when the land above it is sold or otherwise passed on to a new owner.
However, it is possible to sever the mineral rights from the land above it, known as the surface rights. This is common practice in areas where there are known mineral reserves, such as an oil and gas field.
Even after being severed from the surface rights, mineral rights include the right to access the minerals through the surface above. So if you own oil and gas rights but don’t own the land above it, don’t worry, your minerals can still be extracted.
What’s the Difference Between Leasing and Selling My Oil and Gas Rights?
Mineral owners looking to monetize their oil and gas rights generally have two options: lease or sell.
Leasing your minerals gives the Lessee the right but not obligation to begin extracting minerals at any point during the term of the lease. If the term expires and no production activity has begun, the lease is terminated and you are free to release the minerals to another party.
The current practice is to issue a paid-up lease, meaning the lessee pays a lump sump of money known as a lease bonus payment, plus an agreed-upon royalty on all future oil and/or gas that is produced. A higher royalty rate usually decreases the size of the initial bonus payment.
If you’ve received an offer to lease your oil and gas rights in the mail, be sure to check out our tips for leasing before signing a contract.
Selling your mineral rights transfers all rights you have to the minerals for a one-time payment, similar to selling your house or a piece of land. These lump sum payments are higher than the bonus payments from a lease, but for good reason.
When you sell mineral rights you forfeit the right to receive any royalties or other forms of future payment from the production of the minerals.
While there are many people who say mineral owners should never sell their mineral rights, that is not necessarily true. Everyone’s situation is unique, and it is ultimately up to mineral owners to decide what is best for them and their family.
However, selling your mineral rights is something that cannot be undone. It should be given serious thought, consideration, and even professional consultation before moving forward.
What Determines the Value of My Oil and Gas Rights?
When potential lessees and buyers of oil and gas rights are determining the value of a mineral estate, they are not only estimating the total value of the minerals beneath the surface of the earth but also the costs, risks and time involved with the production of those minerals.
Mineral rights are valued on a per mineral acre basis, in regards to both bonuses per acre for leasing and prices per acre for selling. There are several factors that affect the per acre value of an individual’s oil and gas rights for both leasing and selling.
The most important factor is the location. The primary concern of a potential lessee or buyer is how much oil and/or gas exists in a given mineral estate. Because of this, bonus and sale prices per acre can vary widely due to differences in geology and mineral reserves.
The amount of current exploration and production activity in the area also impacts value. Companies tend to pay more in “hot” areas that are seeing a lot of activity because there is a better chance for an immediate return on investment.
A lack of current activity in your area doesn’t mean that your oil and gas rights aren’t valuable. Being patient and waiting for the activity to move towards you can sometimes lead to large financial gains.
The size of a mineral estate (i.e. the number of net mineral acres owned) can also impact price. Part of the cost of producing minerals is the acquisition cost associated with companies leasing or purchasing enough acreage to begin production.
Large mineral estates often lead to lower acquisition costs. This means companies are willing to pay more for larger amounts of acreage. Pooling acreage with family members or neighbors who own nearby minerals can help increase the value of your oil and gas rights.
Another factor that can affect the value of oil and gas rights, specifically for a sale transaction, is whether the minerals are producing or dormant.
Producing refers to oil and/or gas that is actively being extracted from the earth. Dormant minerals are minerals that are currently not being extracted.
Producing minerals are often valued more than dormant minerals because the value of the reserves can be determined with more accuracy and there are fewer uncertainties and risks. Additionally, producing minerals will immediately generate monthly revenue from royalties for the new oil and gas rights owner.
Dormant mineral reserves are unproven, meaning there are more risks with exploration and production, and therefore less value for a potential buyer.
Takeaways
In summary, there are several factors that contribute to the value of your oil and gas rights. Technologies and market conditions are always changing, so the value today won’t necessarily be the value tomorrow.
Ultimately, the current value of your mineral rights is determined by what the market is willing to pay.
Understanding pricing in the area surrounding your oil and gas rights is a great place to start your research. Be sure to create a free account and check out the interactive Mineral Insight map to see what other owners have been offered to lease or sell their oil and gas rights!
Originally published at https://www.mineralinsight.com on June 11, 2019.
