Under the laws of the state of Texas, land ownership has two separate sets of rights, also known as “estates.” The mineral estate refers to anything found under the surface and usually pertains to oil and natural gas deposits. The surface estate refers to anything on the surface, which would include the visible land and any real property built on that land. Water is considered a surface commodity like sand and gravel and is not included as a mineral right.
Because of the history of extensive oil and gas exploration and drilling throughout many parts of Texas, it’s common to separate the two rights and sell the mineral rights separately to a petroleum or natural gas company. The formal division, or “severance,” between the mineral estate and surface estate occurs when an owner signs an agreement to sell the mineral rights and retain surface ownership. Any sale of the land thereafter must be conducted under full disclosure that the mineral rights are owned by a third party.
The right to sell mineral rights is not available everywhere in the world. In fact, only citizens of the United States and parts of Canada have the option. In other countries, the government, royal heads of state and sheiks or shah own all of the mineral rights regardless of who owns the property. This right in the U.S. pertains only to public land. The Federal government owns the mineral rights for all Federal land. On Indian reservations, the individual tribes own the mineral rights.
The question of if and when you should sell the mineral rights to your property is not easily answered. A couple of factors need to be taken into consideration when considering a sale:
Obviously the mineral rights located under land situated in areas that have proven oil or gas reserves are more valuable than property in untested areas. “Wild cat” drillers willing to sink a well in virgin territory will pay on a fraction of the price they would for land with proven reserves. These operations take a gamble, hoping to bring in new fields. Because of the inherent risk of properties turning up dry, their offering price is usually low.
If you know that your property is located within a major, heavily-drilled shale formation or that other nearby properties have successfully extracted oil, you should expect to be paid accordingly.
2. Potential Value of the Mineral Rights
Through geological technology, the size of underground fields can be calculated fairly accurately. What can’t be predicted is the future dollar value of those reserves. If you plan on selling your mineral rights, you must keep in mind that the current price of oil will impact what the oil company is willing to pay per mineral acre. The price per barrel fluctuates greatly, so it’s difficult to know whether you’d be better of selling now or at a future date
Oil prices recently plummeted, and now hover in the same range as prices from the mid-1980s to the 1990s. At under an average of $2/gallon at the pump over the last few months, this shift in gas prices has made many consumers happy, but leaves the U.S. oil and gas industry wondering when they’ll be able to return to previous production levels. An over-supply of oil from Middle Eastern oil producers (OPEC) has greatly exceeded consumer demand, dissipating production here at home. Of course change can happen rapidly, as we saw prices spike from $40/barrel in 2000 to over $140/barrel in just 8 years. If OPEC reduces their output, we will likely see a similar swing in prices.
Making the Sale
Anyone looking to sell their mineral rights should do a little homework:
- Bring something to the table: Based on whether your land has known production capabilities and other current sales in your area, determine an acceptable value range for your rights and don’t settle for less during negotiations.
- Contact experienced professionals: Hiring an attorney show deals with these types of sales on a regular basis is a prudent move, especially since these deals involve huge sums of money.
- Seek out multiple bids: Don’t take the first offer that comes your way. Shop around for bids from multiple buyers so you maximize the sale.