What are Mineral and Surface Rights?
In order to understand the concept of mineral and surface rights, we first need to define the context in which we use the word minerals. For this purpose, minerals do not only refer to the solids under the ground but also, oil and natural gas. Mineral rights refer to the right of an entity to extract minerals from underneath the ground, this entails that everything under the ground is the property of the owner. In contrast to that, surface rights are the rights to the surface of the land and subsurface matter such as sand, gravel, limestone, and water.
Mineral rights initially belonged to the government however, today, depending on the part of the world you’re from, when purchasing a property, you might be entitled to the mineral rights as well as the surface rights. A prominent reason that this was done was to encourage settlement in the western part of the United States.
A complexity to these rights is that the owner of mineral rights is entitled to extraction; this means the surface of the land often gets damaged by land, water, and air pollution but this is only limited to what is considered reasonably necessary for extraction. Still, it may leave your land unusable for any other purpose therefore; it may be in your best interest to purchase a unified estate. However, being the surface rights owner, you have the rights of ingress and egress and you can also claim compensation for any damage to your land in the process of extraction. This compensation is often made in the form of a surface use agreement to the surface owner. Additionally, municipal authorities will prohibit the exercise of surface rights by mineral rights holders in most neighborhoods, residential or commercial. In this case, companies have to depend on horizontal mining to access the minerals underground.
There are 3 major types of mineral property;
1. Unified Estate; both the mineral and surface rights are owned by the same person
2. Split Estate; the mineral rights and surface rights have been sold separately. Often this is done by selling a piece of land but retaining the mineral rights in the contract.
3. Fractional Ownership; different parties are entitled to fractionated areas of minerals.
Mineral Rights Leasing
To know if your property includes mineral rights, you need to contact a lawyer to help track down all the previous owners of the property because even if the contract says that the property is a unified estate, it may be incorrect. Tracking down all the previous owners, even if one of them withheld the mineral rights, he claims the right to them and may have leased or sold them further thus, getting into contact with the mineral owner or lessee of your land might be a complicated process. The hassle is well worth it when purchasing land to make sure that it comes with mineral rights because if it doesn’t, you can’t get them back unless they’re purchased back.
In areas rich with minerals, the mineral rights are often bought and sold considering future gains, if you’re looking to invest, you can find mineral rights for sale from Pheasant Energy. Another investment aspect of minerals is the leasing of mineral rights to companies that can extract and provide them to the markets. Leasing allows them to have access to the minerals for some time until the lease expires. The owner of the rights, in turn, receives royalties on the mineral that he leased rights to such as oil royalties for an oil lease.
Royalties are a portion of the return on extraction that is paid to the lessor (often 12.5 to 25% however, in current economic conditions, oil royalties have fallen as low as 0.5% to control the oil prices)
There are 4 different types of royalties when it comes to mineral rights leasing;
1. Working Interest; the owner shares both, costs and revenue with the lessee
2. Royalty Interest; the owner does not have to contribute anything to the setup but still receives a portion of the return on production.
3. Overriding Royalty Interest (ORRI); the owner gives a percentage of the royalty to another party for their contribution such as a geologist for an analysis of the land
4. Non-Participating Royalty Interest; the receiver of this royalty is not entitled to make any decisions regarding the production or further share his interest. He is also not entitled to any bonuses.
Investing in Gas and Oil Royalties
Stocks might be the most well-known place to invest however, the investment markets are getting more creative by the day and oil royalties might be something you want to research. The way royalty interests work is that the owner of mineral rights, who is entitled to the royalties, may sell a share of future oil royalty payments to gain cash. Similar to stock markets, brokerages can help you trade these royalties to make significant gains off the fluctuating prices of oil and gas. To gain 100% of the oil royalties, find mineral rights for sale from PheasantEnergy.
Leave a Reply