May 11, 2015
Land is not just land. The sky above and the minerals below belong to the landowner. In a pure and ideal world the foregoing would be absolutely true. Alas, it is only mostly true. The mineral rights to land stay with and are owned by the land titleholder unless they have been severed. Severed means previously sold or given to another party. More often than not the land titleholder owns the mineral rights to the land. A property's mineral rights can add value to the land for purposes of selling, valuing or investing in land. Mineral rights may also be separately and profitably sold, assigned or leased for extraction, yielding signing bonus payments to the original lessor and royalty payments on production for later owners. Because the production capacity of many areas is uncertain and in some instances untested, valuing the property with mineral rights both before and after a lease has taken place can be less than straightforward. The landowner, rancher/farmer must also first do a mineral rights search to determine exactly 'what is owned with the land'. The property owner should not rely on memory, guesses or pieces of an old family land abstract to determine ownership of mineral rights. The better method for assessing ownership in minerals is to obtain a mineral rights opinion before venturing into the arena of, 'What are they worth?'
One method of determining mineral rights value used by Professor John Baen of the University of North Texas is that the entire estate, that is all the property, be valued by adding together the separate values of the surface real estate alone and the value of any royalty payments that the property owner may be receiving. Simply adding the values together will form a good picture of the fair market value so long as there is no market premium paid for the purchase of surface and subsurface property rights together.
The valuation of the surface property without mineral rights can present a problem for an appraisal for several reasons. First, especially in areas where there has been little natural resources development, it can be difficult to find comparable properties which have sold without mineral rights attached. This makes separating the value of surface and subsurface rights difficult. Finding any comparable property can be difficult because variations in the size of the plot, distance from known productive fields, and other factors can all significantly alter the value of the mineral rights and complicate efforts to isolate the surface real estate value. Nonetheless, a table of all property sold can assist in determining surface value. More and more we see government agencies granting public access to well field development and even old abandoned fields or wells. This information should be used in any valuation .
Valuing the mineral estate, excluding any surface value or royalties being received, can be achieved in several manners. First, by comparing the table of comparable sales, the appraiser can attempt to isolate mineral values the same way as surface values. Second, the appraiser could attempt to find mineral rights deeds from the area. This can be difficult because unlike property deeds, mineral rights deeds are not always recorded. The value of recorded oil and gas leases in the immediate geographic area is also helpful but is not determinative. Finally, a discounted cash flow analysis on available drilling could be attempted, though this would be impossible for unproven resources, and consequently subject to uncertainty as regards the market value of minerals in the future, costs, and so on.
Valuing the royalty estate obtained in the lease of mineral rights (a so called oil and gas lease) can present its own problems. The basic method is a discounted cash flow analysis on the actual revenues generated from an operating well. This requires assumptions about market prices, consideration of the productive lifespan of the well based on pressure and size of the reservoir, how quickly the well production will decline over time (the "decline curve"), and other "rules of thumb" that the industry uses to determine values of a well. Consulting a geologist or petroleum engineer is an important way to determine production lifespan values.
As can be seen, the traditional 'comparative sales valuation' used in most land appraisal methods does not easily work when the mineral rights component is thrown in. While completing a valuation in a productive reason is more achievable, the above methods should be considered when the land is in a region having some value in its minerals. F
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David Ganje is a natural resources and business attorney with Ganje Law Offices in Rapid City. David wishes to acknowledge the works and writings of Professor John Baen in writing this article.