So you’re buying a ranch in South Texas and you’re excited to live off the land. But first, you have to figure out the mineral rights that come with the property.
Mineral rights can be a blessing or a burden. It all depends on the buyer’s arrangement with the seller and how meticulously the details of the transaction are laid out.
It’s best to work with a lawyer who specializes in mineral rights, but you also need to inform yourself about them to ensure your interests are protected.
What are mineral rights?
In Texas and other parts of the country with rich crude oil and natural gas reserves, mineral rights have become important components of real estate transactions.
The “minerals” referred to are the organic and inorganic substances found in the soil or surface of a real estate property, and “mineral rights” are the rights to access these minerals. Traditionally, these rights belong to the owner of the property, but with the substantial profit that may be gained from them, they have become assets that must be treated separately in real estate transactions.
Oil, gas and mineral lease
You can profit from mineral rights when a company leases your minerals for oil and gas production – an agreement known as an oil, gas and mineral lease. While many of the details can vary, this agreement often involves two components: the lease bonus payment and the royalty percentage.
Lease bonus refers to the cash payment given by the lessee (or the oil and gas company) to the lessor (or mineral rights owner) to execute the lease. A part of the profits from the production of oil or gas is paid to the mineral rights owner as royalty. In many instances, particularly in cases where small land areas are involved, mineral rights owners make their profit from the lease bonus rather than the royalties, which can be zero if no drilling takes place.
Mineral rights ownership
In a real estate sale, the seller or existing owner may reserve ownership of mineral rights. If the mineral rights have been leased to a third party at the time of the sale and the seller wants to maintain ownership of these rights, they have to disclose the information about the lease at the time the sales contract is executed. Without the proper disclosure or arrangement, the mineral rights are transferred to the buyer.
If you buy the property but not the mineral rights, you have to be prepared to allow the lessee to conduct drilling activities in the property. Or, you may arrange for the surface rights of the drilling site to be retained by the seller or purchased by the drilling company. Protect yourself with provisions on compensation for damage to the property, road usage, and others.
Determining the value of mineral rights
The factors that can determine the value of mineral rights include:
- The site’s production rate and “decline curve,” which shows the production history of a well and predicts its future productivity. If the site has been or is being actively drilled, it’s much easier to determine productivity. Inactive sites need to be explored first to determine their productivity and the quality of the hydrocarbons that may be produced from them. Without this determination, inactive sites are typically valued less than active ones.
- The site’s geography and geology, which affect the quality and amount of hydrocarbons in the ground.
- The quality of produced hydrocarbons, which greatly influences crude oil pricing.
- Oil and gas prices on the commodities market.