Mineral rights and what they mean to landowners
November 23, 2016
In many states, oil and agriculture are the top revenue-producing industries. One needs the land for what is under it, and the other needs the land for what it grows on top.
Oklahoma has long been in this category. Oil producers and landowners have learned to work together toward this goal. There are advantages and drawbacks on each side, but the arrangement has been a long one.
Oklahoma ranks second in the United States for number of oil wells. Landowners make leases with oil companies to receive a royalty in exchange for placing wells on their property. That is if the property owner maintains his mineral rights. If a landowner does not retain mineral rights on a piece of land, the mineral owner may lease the rights for drilling and things can get complicated – and combative.
Corb Wilson is heir to the Adams Wilson ranch in Nowata County, Oklahoma.
“I own mineral rights on 2,500 acres and we have one section where I don’t own the rights. I would never consider buying another piece of ground without the mineral rights,” Wilson said.
“It’s (oil contracts) different for everyone,” Wilson said. “We had a good lawyer and he got us a pretty good deal.
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“I think most standard contracts give a three-sixteenths royalty on mineral rights of whatever they produce. The company we deal with is probably an exception. They pay a little more than that.
“Especially in this part of the country, companies pump the water from drilling bank in the ground, which in theory produces more oil. Our land use contract with the company says any line must be two feet deep, so if I plowed and hit a line at one foot, the company must clean it up to the owner’s specifications.
“You need a good lawyer and a good land use contract,” Wilson said. This is especially important, because many leases are lifetime as long as the pumps run.
“Most standard contracts say if a pump doesn’t run in 18 months, the landowner gets part of the lease back. Ours is a little better than that. Ours says if a pump doesn’t run at least a full day in a year, we get part of the lease back.” For any well not producing on Wilson’s ranch, he gets 100 acres of the lease back.
“It’s a full-time job when you have them (the oil company) on your place,” Wilson said.
“But this company has been good for Nowata and is very easy to get along with. I’m all for oil exploration. It makes the cow business really easy.
“Those guys have a tremendous cost to operate. Sometimes they are drilling and they can tell it (the well) won’t produce, so they just stop and cap it off. There are twin brothers that drill on our place and they have a good geologist. He can tell by smelling if a well is going to produce.
“Every line they lay, we get $1 a foot, but we try to work with them,” Wilson said. For instance, if the company can lay a line adjacent to a road, the $1 per foot may be waived. This means less cost to the company and less surface damage for the owner.
Sometimes cattle get hurt by the equipment. For instance, the two-inch drilling and casing pipe has a plastic coating on the threaded ends.
“Sometimes that plastic will get around a calf’s foot and you don’t see it until it swells. I’ve never had a problem with the company paying for cattle damages.
“We lost one this spring that got his head stuck in the pump jack. The company paid premium price on that calf.”
It’s a different story if a landowner doesn’t own the mineral rights.
“On that section, they drilled 52 wells mostly at the same time,” Wilson said. “It will ruin the grass. If you don’t own the rights, you get surface damage only. The amount depends on the contract." Wilson’s contract was $1,500 per well.
“Respect is the key. It increases property value (having wells).
“But I would not touch another piece of land without the mineral rights.”
Know your rights
Oklahoma has a mineral owner registry, which maintains contract, death and inheritance information.
Often people who own mineral rights miss out on payments because companies could not make contact. In Oklahoma, state agencies are not required by law to keep address information for mineral owners current.
Oil companies use this database for due diligence to make contact for oil and gas leases. If mineral owners cannot be contacted and a company wants to drill, the state will lease the mineral rights for the owner. In this case, the mineral rights owner misses out on the signing bonus and monthly royalty payment.
There are non-attorney companies that search mineral rights, as does the Bureau of Land Management. A lot of mineral rights money is owed to owners in Oklahoma because they cannot be found; about $53 million in 2013. The highest owed was $329,270 in 2012. Missing owners may claim the money from the state at any time.
If mineral owners can’t be found, states will allow the oil companies to lease land and drill under it with a force pooling arrangement for the proceeds. Due diligence to look for mineral rights owners requires only sending a letter to the owner’s last known address.
Negotiating an offer
The initial offer to lease land may come from someone at a land company hired by the oil company. Other times, speculators contact landowners regarding leases. The speculators either attempt to resell the lease to an oil and gas company, or use the lease to participate in any wells already on an unexpired lease.
Although there are some drawbacks to working with an oil company, oil or gas wells on property where the owner retains mineral rights provide a constant source of revenue. The amount may fluctuate, but it is constant. Oil wells on your property also increase the value. At times, that value is great.
“When oil was $100 a barrel, I ran my cows for free,” Wilson said.
In most states, surface rights are secondary to mineral rights. The typical footprint for drilling, completion and production of a well is generally three to 10 acres. Horizontal drilling has reduced the area needed for oil and gas wells because it allows access to minerals under adjacent tracts from a nearby location, thereby minimizing surface damage.
Surface damage clauses can be added to a lease, including surface damage payment. This is to compensate the owner for altered production capacity for timber, crops, pasture, or other above-ground enterprises. A third party may be needed to appraise the value.
Another common lease clause is no drilling within a certain distance from a house, water well, septic system, barn, pond, or any other place specified by the owner. Consideration of on-site or near-site water sources must be made. Water is required to drill for oil and gas. The owner’s water must be protected.
Land reclamation is an important clause and is sometimes included in the lease itself. This is basically to insure the company will restore land to the original condition as it was before the drilling. The owner should negotiate compensation for current and future losses.
Oil and gas wells can minimize the attractiveness of the land surface. Well water may be affected by shale gas drilling. Property values could decrease due to an unstable supply of clean water. If the minerals are leased under a property, the value will decrease because a buyer can’t get the whole package, but money made from minerals may offset any decreased property value.
Before signing a mineral lease, the owner should get an appraisal to find out how much the land will be devalued by adding rigs. These figures should be used to negotiate the sign-on bonus from the company and royalty payments to compensate for loss of land value in case the owner decides to sell the land.
Rigs on adjacent land may lower property values. For example in the Colorado boom, land values saw an estimated 15 percent reduction.
Mineral rights account for $2.2 billion of revenue in taxes to Wyoming state and local economies. Wyoming is seventh in oil production, second in gas production and first in helium.
Property purchased in Wyoming may not get all the surface and mineral rights. Approximately 11.6 million acres of private land in Wyoming is in a split estate – meaning surface rights are privately owned and the federal government owns the mineral rights. This is the result of the Stock Raising Homestead Act of 1916 signed by President Woodrow Wilson. The act provided a settler could claim one section of non-irrigable land designated by the Secretary of the Interior as “stock raising.”
Because mineral exploration was escalating, the federal government opted to maintain the mineral rights. The surface owner has no right to the minerals, which are owned by the government and administered by the Bureau of Land Management. Minerals include non-chemical items such as sand and rock.
The SRHA was expanded n 1982 to include more materials. The government decided to make those items available for purchase by the landowner. So a farmer or rancher could buy sand or gravel from his own land. The landowner does have the right to develop the land in the manner set out in the Homestead Act, including water resources and infrastructure associated with grazing and raising forage crops.
A decade ago, no one showed much interest in mineral rights in Colorado, but with the advent of deep drilling, things have changed. Past mineral rights sales may not have been recorded, so there can be dozens of owners.
Most Colorado deeds have no reference to the mineral interests. Title companies include an exception saying all mineral interests are excluded and not insured. Mineral title opinions can be accomplished through attorneys.
Factors change from state to state, for instance, the length of leases. Though leases are often long in Oklahoma, the primary term in active areas is usually three years, though they may be as short as six months or as long as five years. In less developed areas, as many as 10 years are still asked for in a primary term. The idea of not locking up the lease is that if the area becomes high-producing, the lease can be renegotiated. Oil and gas areas are known to be high-producing in Oklahoma, so landowners want to lock in the highest rate possible and keep it since they are often assured the production will continue.
In general, if a lessee starts drilling a producing well during the primary term, the lease rights will be extended into a secondary term, which will continue for as long as there is production in paying quantities from the leased premises. This accounts for lifetime leases in Oklahoma. Conversely, it can account for leases, which do not extend past the primary term in other states.
Whatever a landowner decides to do in regard to mineral rights, it would be prudent to do research and get the help of individuals or companies familiar with mineral rights in that state.