Fee Simple – Total Ownership
All mineral resources in most countries around the globe belong to the government. All valuable minerals, oil, and gas found within or on the Earth are included in this category. Without government authorization, organizations or individuals from these countries cannot legally extract or sell any mineral rights or commodities. The United States, and some other countries, were the first to acquire mineral resources. These property owners owned both “surface rights”, and “mineral rights.” This private ownership is called a “fee-simple estate.”
The simplest type of ownership is called fee simple. The owner has control over the property’s surface, subsurface, and air. These rights can be sold, leased, gifted, or bequeathed individually or to an entire group.
Real estate transactions were simple fee-simple transfers in the days before drilling and miners’ permits. The ways people can own property changed when commercial mineral production was possible. Today, multiple individuals or companies can have partial ownership or rights to several real estate parcels through a variety of transactions, including sales, gifts, bequests, and leases. Many states have laws that regulate the transfer of mineral rights from an owner to another. There are also laws that regulate mining and drilling activities. These laws can vary from one state or another. It is important to be familiar with the laws in your state if you are thinking about a transaction for mineral rights or have concerns about mineral extraction from your property. An attorney can help you understand the laws and how they relate to your case if you don’t know them.
Surface Rights vs. Mineral Rights
“I’ll pay $100,000 for the coal under your property!” This transaction has been repeated many times. A coal company has the right to the coal, while the fee-simple owner might not have the right or ability to produce it. This transaction allows the owner to sell coal, but keep control and possession of the surface. Coal companies want to produce coal, but don’t want to pay extra for buildings or the surface. The property is divided into two. The buildings and rights to the surface will remain with the original owner, while the coal company will get the rights to the coal. You can include all known or unknown minerals that are beneath the property. Or, you can limit the transaction to one mineral commodity, such as “all coal”, or a particular rock unit.
Mineral Rights Buying and Selling
Selling/buying a coal seam can be more complicated than selling/buying a car. You simply buy the car, pay the taxes and then transfer the title to the government. The car is yours. The car goes to the junkyard when it is no longer needed. The buyer, as well as all future mineral rights owners, will be able to exploit the property if mineral rights are bought. The seller must also accept the consequences. Mineral extraction is almost always a distant possibility. Many mining companies schedule equipment and workers years in advance. The mining company may also purchase the property in the future as a “reserve.”
The new owner of the mineral may not have any plans to produce it. They simply bought the property to invest. They want to sell the mineral rights to a company that will take overproduction. Many mineral properties are purchased by speculators who do not intend to mine. They simply want to act as “middlemen” and buy valuable property from owners and then broker it to mining companies at higher prices. These “speculator” buyers often use options. Option transactions offer property owners a chance to purchase the property at a specific price, on or before a certain date in the future. The speculator quickly seeks out someone who will pay a higher price and make a substantial profit. The property owner retains the option payment if the speculator does not pay the price specified by the expiration date.
A company that buys mineral rights also acquires the right to access the property and extract the resource in the future. Most of these transactions are done without the consent of the surface owner. They have no control over when, how, and how the property will be restored. Most disputes between sellers and buyers occur during mining. The seller must plan for what could go wrong, and create a contract to protect his rights. Remember that your grandson may own the property when it is extracted. He will accept the deal even though you were not paid upfront.
Mineral Leases and Royalties
Sometimes, a mining company may not wish to purchase a property due to uncertainty about the amount, quality, or type of minerals found there. These situations are when the mining company leases the mineral rights, or a portion thereof.
A lease gives the mining company permission to enter the property and conduct tests. The mining company will pay the property owners a sum of money to acquire this right when the lease is signed. The mining company reserves the right to the property for a specified period of time by paying this payment. The company may mine if it finds suitable minerals. If the mining company fails to start production before the lease ends, all rights to the property as well as the minerals will be returned to the owner. The owner receives a portion of the income from the mineral production that occurs on leased property. This money is called a “royalty payment.” The lease agreement will specify the amount of the royalty payments. The royalty payment can be fixed per ton or percentage of the production value. You can also use other terms.
The property owner should anticipate what the lessee might do when they explore the property. Exploration might involve drilling holes, opening excavators, or bringing equipment and tools onto the property. A good lease agreement will define what is permitted and what needs to be restored.
Oil and Gas Unitization and Pooling
Oil and gas can move below the surface of the rock. They can travel through small pore spaces, such as between grains of sand in Sandstone or through tiny openings caused by fractures. This mobility allows wells to draw oil and gas from nearby lands. If the well is drilled close enough to the property boundary, it could drain gas from neighboring land. Some states recognize the possibility that oil and gas can cross underground property boundaries. These states have developed regulations to ensure fair distribution of oil and gas royalty payments. When a permit is granted for drilling, these states require that drilling companies specify how oil royalties will be divided among nearby property owners. Based on what we know about the geometries of oil and gas reservoirs, the proposed sharing of royalties will take into account the geometry of property owners at the surface. This is called “unitization”.
Some states don’t have any rules regarding the unitization of royalties for oil and gas. Others have them, but they are only applicable to wells that produce in certain areas or at certain depths. These rules can be crucial in resource development or leasing strategies. People tell stories of landmen telling their neighbors to lease them now, or they will drill on your land and take your gas without charging you. Sometimes, this can happen because there are no state regulations. For advice about how the laws in your state will apply on your property, contact an attorney if you are contacted regarding leasing mineral rights.
This information should not be construed as legal advice. The article gives examples of what might happen when valuable commodities are beneath the ground. If you are interested in a mineral rights transaction, it recommends that you seek professional advice from experienced in the industry as Pheasant Energy.