Many people are fortunate to own property where valuable oil or natural gas deposits are hidden underground. Upon discovery, companies can drill and extract the resources for a hefty profit, but first they have to secure the mineral rights from the property owners. Property owners essentially have two options for monetizing their mineral rights: leasing or selling. Huge sums of money could be involved, so it’s prudent for landowners to look at the profitability of two options available to them before passing their mineral rights over.
Leasing Mineral Rights
- Continued Ownership: When you lease your mineral rights, you are giving the energy company the right to begin drilling and extracting, but you still own the long-term mineral rights. Think of your land as a house that you lease out. The tenant can live in the house and use it, but you still own it when they leave.
- Lease income PLUS royalties: In the case of leasing mineral rights, the lessee pays to lease your property. Additionally, the lessee pays you a royalty on the sales of any oil and gas extracted and sold. Once the lease has expired, you own whatever minerals are still left in the ground.
- No Drilling, No Royalties: The lessee doesn’t have to commence drilling immediately, so you may not see much royalty income, if ever, from your lease. The lease contract will likely contain a primary and secondary term. During the primary term, the drilling company has the right to perform exploratory procedures to determine where and when they want to start drilling. Once drilling begins, the secondary term determines the remaining time left on the lease. If drilling never commences during the primary term, the contract will likely terminate, and you won’t see any royalties from drilling.
- Risk Losing Value: The lease may promise big royalty pay-outs, but in reality, there’s nothing you can do to force the drilling company to begin extraction. If you sign a lease contract during an oil boom, you risk missing out on cashing in on your minerals at a peak time.
The contracts that cover leased mineral rights can be confusing and downright tricky to understand. Be sure you’re not selling your rights when the intent is to lease them. The contract must contain language that spells this out clearly a lease bonus and/or royalty percentage and the length of the lease in terms of days, months or years.
As opposed to leasing, when you outright sell your mineral rights, you are giving up all future claims to those minerals. You’ll receive a sum of money up-front that grants the buyer all of the mineral rights under your acreage and all future proceeds if/when these mineral rights are extracted.
- Lower Risk: When selling you mineral rights, you give up all future claims to those rights, but you are also ensured that you will receive a specified dollar amount per mineral acre. Conversely, with a lease contract, most of the value to the mineral owner is promised in royalty payments, which may or may not ever happen.
- Immediate Income: Selling your mineral rights is a great option if you are in need of immediate cash. Those that lease mineral rights may have to wait years to start seeing royalty checks of any substance.
- Lower Value: Because selling mineral rights has less risk involved, you may also not realize the full value of your property. Often, buyers will pay as little as 1/5 to 1/3 of the estimated mineral value.
- Loss of Control: Selling your mineral rights separates your land into a surface estate and a mineral estate. The company that now owns your mineral estate also has rights to use your surface estate as needed to access drilling sites. Property owners have very little control or recourse in battling what the drilling company may do on their land.
Mineral owners must carefully weigh the options when determining whether to lease or sell their mineral estate. It’s wise to speak with both a professional landman and an attorney who specializes in mineral rights prior to signing a contract. These professionals can help you assess the value of your mineral rights and provide guidance on maximizing the value of contracts with drilling companies.