We’ve worked with tens of thousands of mineral owners over the years, and know first hand, that mineral owners frequently struggle to make heads or tails of what they own. Many times, the minerals are passed down through inheritance, which means the beneficiary has little-to-no experience with this asset class.
Much like you, they start their search to become educated. They often find is that it’s difficult to even understand what exactly they own, which makes it hard to do research, let alone figure out what they should do to maximize the value of their minerals. We started MineralAnswers.com to address this helplessness and confusion, and provide a free resource that helps guide mineral owners through your mineral ownership journey.
There’s an encyclopedia worth of information on the topic of oil and gas mineral ownership. We’re going to try and break it down into easy to consume chunks, and then you can decide how deep you want to go with your learning at your own pace.
First, let’s talk about what mineral ownership is, as it relates to oil and gas in the United States and why it’s unique to North America.
Citizen mineral rights ownership is unique to the US.
If you own minerals in the U.S., you’re part of a fortunate and small group of individuals (estimated 12-15 million). For most of the world, mineral rights are owned by governments instead of individuals or companies. If you look at the top producing oil countries around the world, what you’ll find is the only places where individuals or corporations can own mineral rights are the United States and a small portion of Canada, where lands are not owned by the crown.
Owning mineral rights refers to owning rights to recover the minerals below the surface of a property. These rights can be worth a lot of money for mineral rights owners in hot spots for oil and gas extraction. Let’s start with understanding what is a “mineral” in relation to owning mineral rights.
What is considered a “mineral” when understanding mineral rights?
For mineral rights, there is no clear definition of “mineral” that applies in every situation. What’s considered a “mineral” can even change from state to state. However, the term “mineral” in this industry is generally used to describe crude oil, natural gas, coal, metal ores, gems, salt, helium, and construction aggregates. There can be others but these are the most common for mineral extraction.
What are the different types of mineral rights ownership?
- Mineral Interest (MI) – are interest generated after the production of oil and gas after the sale of a deed or a lease
- Royalty Interest (RI) – a royalty interest occurs when minerals are leased. When the mineral owner enters into and agreement with another party, the original owner retains a royalty interest which entitles them to a share of the revenue generated from the oil and gas produced. This type of ownership is not responsible for any costs to produce the oil or gas.
- Working Interest (WI) – also occurs through leasing and is associated with any and all exploration, drilling, development, and operation of the property. These types of interest are on the hook for expenses pro-rata to their working interest percentage and frequently have to put in additional capital for operation expenses (maintaining existing well, drilling new wells on the lease).
- Overriding Royalty Interest (ORRI) – differs from the previous types of ownership in that it does not provide ownership of any materials under the ground (minerals), but rather ownership of a portion of revenue generated from oil and gas production. This interest is dissolved or expires with the termination of the property lease.
Severed Minerals (aka Split Estate)
Mineral rights ownership can be a split estate where the mineral rights are “severed” or split from the surface rights. As a result of this, the surface property owner does not always own the rights to the minerals beneath the surface, such as the oil and gas. It’s important to know that in most cases the surface owner cannot restrict the mineral rights owner from access to extracting minerals. However, it’s important to keep up with state and other local laws regarding mineral rights ownership and surface property ownership as these can vary.
Here are the three different types of mineral rights ownership, also known as mineral estate:
- Unified Estate: The surface and mineral rights are not split or “severed”. This is often referred to as “fee simple” or “unified tenure” as the surface property owner is also the mineral rights owner. This is the highest form of real estate ownership. The owner of a unified estate has the exclusive right of how the land is used and sold.
- Severed Estate: This type of real estate occurs when the mineral rights are not owned by the same person or entity as the surface rights. This is becoming more and more common as land is passed down between generations and as more companies purchase mineral rights from individual mineral rights owners.
- Fractional Ownership: This occurs when the same mineral rights property is owned by two or more entities. The owners end up with a percentage of the full acreage amount. This is very common when inheriting minerals.
When mineral rights are passed to heirs, they often become shared among multiple people. For example, if your parents own 40 acres of mineral rights and they want to leave the mineral rights to you and your three siblings, it would be common for them to give you all a ¼ share in the full 40-acre tract of land. In the oil and gas industry, the common terminology to describe this would be that you own 40 gross mineral acres and 10 net mineral acres. In this example, all four siblings would receive the exact same share of revenue regardless of where the wells are drilled on the 40 acres. They each would own 25% of each acre of land.
This is different than what’s usual for leaving behind surface rights where you may each get 10-acre piece of property all to yourselves.
Five Key Things to Know About Mineral Rights
- Mineral rights ownership for individuals is mostly unique to the United States.
- The mineral rights owner can be different from the surface owner.
- Minerals can refer to different things based on the state, but extracting oil, natural gas, and coal are the most commonly extracted minerals.
- A surface owner usually cannot restrict a mineral owner from access to extracting minerals. However, keeping up with state laws is recommended.
- Mineral rights acreage is more commonly shared among multiple owners.
How are mineral rights valued?
The value of your specific mineral rights depends on both the market value in your area and the status of the mineral rights you own. If you are interested in valuing or selling mineral rights, it’s important that you understand the status of your mineral rights as seen through the eyes of a potential buyer. Just like with any other asset, the market sets the price, so your minerals are “worth” what a buyer is willing to pay for them at that point in time.
There are three main stages or statuses of your mineral rights
- My mineral rights are producing and I’m receiving checks
- My mineral rights are not producing but they’re leased to an oil company
- My mineral rights are not producing and are not leased
My mineral rights are producing and I’m receiving Checks
Producing mineral rights have current production, or cash flow, associated with them. Area market value being equal, producing mineral rights typically demand the highest market value because they are de-risked to the point that they are producing cash. It’s also easier for a mineral buyer to create an offer for an owner looking at selling mineral rights. For example, you may receive an offer of 50 times the amount of the average cash flow for the last 6 months. If you have wells that are producing on your property lease, MineralAnswers has an easy way for you to track your production and stay informed when new production is reported by your operator on your well.
Beyond the current production, there are many additional factors unique to plays and basins that can create considerable upside and effect the market price when selling mineral rights. An example of this would be multiple producing formations or “stacked” pay in your lease.
If you have producing mineral rights, a potential buyer will usually request copies of your last few check stubs. This accomplishes three key things:
- It proves the oil company agrees you own the property
- It states the exact ownership percentage in your well or group of wells
- It allows the potential buyer to project future revenue which is helpful and often mandatory when creating an offer
My mineral rights are not producing but they’re leased to an oil company
Leased mineral rights refer to mineral rights that are not yet producing but are under a lease agreement. Area market value being equal leased mineral rights would be less valuable than mineral rights that are already producing, but more valuable than non-producing, non-leased mineral rights. Leased mineral rights at least show that an oil and gas company has evaluated the area and determined that the area has enough potential for development in the next few years. A potential buyer will usually request a few key types of land records:
- A copy of your deed. Understanding exactly how many net mineral acres you have is necessary for an offer.
- A copy of your lease. Understanding the royalty percentage is important. A higher fraction of royalties will increase the value. Usually the potential buyer will break down your ownership into net royalty acres which are the net mineral acres you own normalized to a 12.5% royalty. Also understanding the terms of the lease including when the lease expires and if there is an option to extend the lease can affect the value.
Net Royalty Acres Example: Let’s say you own 10 net mineral acres and they are leased to Noble Energy . On the lease agreement, you will receive a 1/4 royalty. This means that for the minerals extracted from your property by Noble Energy, you receive 25% of the production revenue and Noble receives 75%. Now let’s assume a potential buyer comes along and wants to buy your mineral rights. Since you already have a lease in place, the potential buyer often will normalize your acreage to a 1/8, or a 12.5% royalty to estimate future payments. When normalized to a 1/8 royalty you would own 20 net royalty acres since the royalty percentage terms in your lease are so favorable. You would still only own 10 net mineral acres, but in the eyes of a potentially buyer it will pay out more based on the lease terms. This is one reason why good lease terms can create a lot of value in the future for either selling leased mineral rights or for your own future cash flow from the royalties.
My mineral rights are not producing and are not leased
This refers to mineral rights that are not producing and are not under a lease agreement. Area market value being equal, these would be the least valuable mineral rights. However, if these mineral rights are in an emerging area, they can skyrocket in value. It’s important to break these down into a few more subcategories:
Non-Producing/Non-Leased Mineral Rights Near Current Drilling
If your mineral rights are not producing and are not leased, it’s important to know if there is current activity nearby. This is even more important if your mineral rights are located in a shale play. Tracking permits for new planned wells can help you understand if it’s likely that your area will be leased soon. MineralAnswers allows you to set notifications when a new well is planned near your property. If new wells are trending in your area, your property has more upside than areas that are farther away from current development. If this is your scenario, you can reach out to nearby oil companies about leasing mineral rights which is usually coordinated through a landman. MineralAnswers can help you find some nearby oil companies (also known as operators or producers) who might be interested in leasing mineral rights in your area.
Non-Producing/Non-Leased Mineral Rights Near Historical Drilling
If your mineral rights are not producing, not leased, and are not located near current activity, it’s important to know if there is historical production nearby. Usually you can tell by the landscape around your property. If you see a lot of pumpjacks nearby this is a good sign. Although the value of these minerals may not be as valuable as areas with current activity, keep in mind that old plays can always be revived. Historical production means that your area is part of a petroleum system. Remember that the hottest plays such as the Permian started out with conventional vertical drilling a long time ago before they blew up into unconventional plays with horizontal wells.
Non-Producing Mineral Rights in an Area Without Current Activity or Historical Production
For these mineral rights, it’s very unlikely that you would receive offers. It doesn’t mean that it will never happen, but it will probably require a geological analysis that leads someone to believe there are commercial quantities of hydrocarbons in the area. Then an exploratory well, known as a wildcat, would be drilled in hopes of discovering a new field. A successful nearby wildcat can cause the value of mineral rights to skyrocket in value. Conversely, a non-successful well, or dry hole, can keep other potential exploration companies away for a long time.
The image below shows how the relative value of mineral rights changes as you start in the bottom left with minerals that are not leased and not near current or historical activity. Then the value increases for the different scenarios and are highest in value when they start producing cash.
When your mineral rights change status then the value of those minerals can change considerably. It’s important that you are aware of activity in your area that leads to these changes. MineralAnswers has spent a lot of effort to consolidate, clean and simplify the data so that once you join, you can track activity easily and efficiently.