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What are Mineral Rights?

Mar 07

A few years ago, it seems that I spent a great portion of my time reviewing oil and gas mineral rights leases. Many of you remember the recent mineral rights “boom” in this area, where oil and gas companies were frantically leasing up mineral rights. I don’t know what the current status of these companies are, or if they will ever begin drilling for oil or natural gas, but I have had several questions from people wanting to know a little more about what “mineral rights” are. The most recent question came last week from a reader who suggested I write a column about mineral rights.

In most countries of the world all mineral resources belong to the government. This includes all valuable rocks, minerals, oil or gas found on or within the Earth. Organizations or individuals in those countries cannot legally extract and sell any mineral without first obtaining authorization from the government. In the United States, however, ownership of mineral resources was originally granted to the individuals or organizations that owned the property. These property owners had both “surface rights” and “mineral rights.”

Complete ownership of property includes ownership of the surface rights and mineral rights. The owner also has the freedom to sell, lease, gift or bequest these rights individually or entirely to others. Before drilling and mining, real estate transactions included both mineral and surface rights. However, once commercial mineral production became possible, the ways in which people own property became more complex. Today, the leases, sales, gifts and bequests of the past have created situations where multiple people or companies have a partial ownership of rights to many real estate parcels.

Mineral rights in this area are leased by oil or gas companies more than they are outright transferred.  To entice the property owner to commit to a lease the lessee generally offers a “signing bonus.” This is an up-front payment to the owner for granting the lessee a right to explore the property for a limited period of time (usually a few months to a few years). If the lessee does not explore or explores and does not find marketable oil or gas then the lease expires and the lessee has no further rights. If the lessee finds oil or gas and begins production, a regular stream of royalty payments usually keeps the terms of the lease in force.

In addition to a signing bonus, most lease agreements require the lessee to pay the owner a share of the value of produced oil or gas. The customary royalty percentage is 12.5 percent or 1/8 of the value of the oil or gas at the wellhead. When oil or natural gas is produced the royalty payments can greatly exceed the amounts paid as a signing bonus

If you are considering a mineral rights transaction or have concerns about mineral extraction near your property it is essential to understand the agreement you are being asked to sign and the associated laws. If you do not fully understand the mineral rights transfer you should get advice from an attorney.