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Introduction to Mineral Rights

According to a report by IBISWorld, a leading business intelligence firm, the total revenues for the oil and gas drilling sector came to $2 trillion in 2017. This sector is composed of companies that explore for, develop, and operate oil and gas fields. Since the 2017 estimates for worldwide gross domestic product range between $75 trillion and $87.5 trillion, the oil and gas drilling sector currently make up something between 2% and 3% of the global economy. The industry includes companies that specialize in crude petroleum production, the mining, and extraction of oil from shale or sands and the recovery of hydrocarbon liquids. It also includes all natural gas producers and those that recover sulfur from natural gas. It does not include companies that transport, refine or market oil and natural gas. For those companies that perform both included and excluded operations, only the estimated revenues from included activities are counted toward the $2 trillion industry figure.

Mineral rights: a mineral right is a right to extract a mineral from the earth or to receive payment, in the form of royalty, for the extraction of minerals. “Mineral” may have different meanings depending on the context, and there is no universal definition. However, “mineral” generally includes:

  • Fossil fuels – oil, natural gas, and coal.

  • Metals and metal-bearing ores – such as gold, copper, iron, nickel, zinc, etc.

  • Nonmetallic minerals and mineable rock products - such as limestone, gypsum, building stone, salt, etc..

Mineral rights ownership, however, refers to who owns the rights to extract minerals that are, oil, gas, gold, coal and other metals and minerals from lands located in that country. This ownership is very important since the rights confer considerable potential for profit from the extraction of these minerals. In virtually all countries around the world, the owner of the surface land, be it a house or farmland, has absolutely no rights with regards to mineral ownership. Indeed, it is the central governments or monarchs who own such rights. The exploration and production of minerals, especially oil and gas, have played an important role in the economic development of communities who are oil rich. The rights to develop minerals in most states and cities are based mainly on common law doctrines. Who owns the mineral rights for a parcel of land? A mineral right is a property right and may be sold, transferred, or leased similar to other property rights. Mineral rights are distinct from “surface rights,” or the right to the use of the surface of the land for residential, agricultural, recreational, commercial, or other purposes. Mineral rights may be sold or retained separately from the surface rights, in which case the mineral rights are said to be “severed.” A person may own all of the mineral rights for a parcel or any fraction of the rights. A person may also own particular mineral rights, such as oil and gas, or to only one formation or depth interval. The ownership of the mineral rights in a parcel can usually be determined by examining the deed abstract for the property.

Who can develop the minerals in a particular tract? A mineral owner may develop his or her own mineral deposits. Alternatively, a mineral owner may lease his or her mineral rights to a mineral development company. By executing a lease, the mineral owner (the lessor) grants to the person or company who receives the lease (the lessee) the right to develop and produce minerals in the leased parcel. The owner or lessee of the mineral rights, whether severed or not, has the right to reasonable use of the land to extract minerals from the property. However, the owner of the surface rights to a parcel may be entitled to compensation for loss of crops or timber.

How does the oil industry get to obtain the ability to extract oil and gas from lands? Typically, governments will section their lands into discrete areas, commonly referred to as licenses. Governments will then offer such licenses, on a regular basis, to oil companies, on certain terms that will allow such oil firms to begin exploration and eventual development and extraction of any oil and gas located under the lands. The terms offered by governments vary considerably worldwide. In the USA the process is rather different. The oil companies here contact the owner of the mineral rights directly and negotiate terms. These terms comprise the following three principal elements: a cash bonus payment paid on completion of the mineral lease agreement; a royalty share of all oil and gas extracted from under the lands in question. Consequently, it can be concluded that the major motivation for a landowner who also owns the mineral rights is the royalty interest since they could enjoy a very substantial income for a long period into the future. The right to extract minerals from lands located in the USA is radically different from that anywhere else in the world. This has had huge implications for the structure and scope of the oil industry in that country. As a result of these implications, numerous opportunities exist today to acquire high-quality mineral lands on reasonable terms in areas proven to be highly productive of oil and gas.

For those in possession of a piece of land that’s rich in oil, gas, or high-demand minerals, selling the property or its mineral rights may ultimately be in your financial best interest because no matter how you came to own your interests, you stand to receive a generous amount of money by selling.