I Would Like to Sell My Oil and Gas Mineral Rights, What Factors Should I Consider?
Nothing in this article is to be considered legal, tax or investment advice. Please consult with your attorney and tax professional.
Many factors can compel a landowner to sell their mineral rights. Similarly, having little to no knowledge about the value of royalty interests could be expensive in the long run. Royalty interests are highly marketable because they are liquid. So, finding the perfect buyer is not an issue, the problem is determining the right price for the deal.
Having little connection in the oil and gas arena has been a significant challenge for many property owners: they don’t know much other than the oil drilling benefits they receive from oil companies.
Buyers take advantage of property owners by bidding below the royalty’s aggregate market price to make profits. For this reason, it is crucial for a mineral owner to know the value of their royalties before liquidating, to secure lucrative bids.
Having little connection in the oil and gas arena has been a significant challenge for many property owners: they don’t know much other than the oil drilling benefits they receive from oil companies.
Buyers take advantage of property owners by bidding below the royalty’s aggregate market price to make profits. For this reason, it is crucial for a mineral owner to know the value of their royalties before liquidating, to secure lucrative bids.
Increased efficiency in drilling rig operations
Most well drilling companies such as drillco have placed rigs on standby due to a drop in oil and gas prices. Competitively speaking, inefficient machines are idled, while competitive rigs continue to work. Advanced drilling methods allow the same equipment to drill deeper and faster. While drilling rigs have reduced drastically, drilled wells have reduced at a negligible rate. Thanks to modern techniques, rigs can drill several wells from one pad. Despite the low oil prices, the past two years has seen drilling efficiency improving significantly. In fact, experts predict that drilling efficiencies will become more effective in the future.
What are mineral rights?
A mineral right can be defined as the right of ownership of oil and gas resources. There is a significant difference between mineral rights and surface rights. The latter gives a person the right to sell the surface of a piece of land. However, a surface rights owner with o mineral rights cannot exploit underground resources.
What resources do you own when you hold mineral rights?
Before selling your mineral rights, you should be able to answer the following questions: Firstly, are you the owner of the mineral rights? Secondly, is the information on the title deed about you being the landowner correct? Often, legal documents contain information about the landowner and land ownership. However, it is likely that your title deed is “fee simple.”
What is a fee simple?
A fee simple is a document that proves complete ownership of land. In the oil and gas context, a fee simple shows mineral rights ownership. Sometimes the document may be written, “subject to” or “less and except” which means you own a small portion of the rights or none at all. You should hire an expert to help you determine which parts of the mineral rights to sell and to verify your ownership.
Surface control
Firstly, be sure you will retain your surface rights even after selling your mineral rights. As the mineral rights owner, you also control the ground surface. So, anyone who wants to use your land in any manner must ask for your permission and direction first.
Once you sell your mineral rights, you cease to control your land. While the surface land remains under your control, the mineral rights owner has the right to drill your land, regardless of how you want to use it.
So, it is wise to lease the land. This way, you can earn royalties while retaining the rights of your land surface. Before selling your mineral rights, think of the above factors first. Leasing is equally lucrative, and perhaps safer than selling the mineral rights. Ideally, look for ways you can put your land to use without selling your mineral rights.
Surface rights differ from mineral rights in the sense that the latter requires landowners to create some form of protection agreement. So, include additional clauses into the contract to protect your property.
Once you sell your mineral rights, you cease to control your land. While the surface land remains under your control, the mineral rights owner has the right to drill your land, regardless of how you want to use it.
So, it is wise to lease the land. This way, you can earn royalties while retaining the rights of your land surface. Before selling your mineral rights, think of the above factors first. Leasing is equally lucrative, and perhaps safer than selling the mineral rights. Ideally, look for ways you can put your land to use without selling your mineral rights.
Surface rights differ from mineral rights in the sense that the latter requires landowners to create some form of protection agreement. So, include additional clauses into the contract to protect your property.
Recognize price and production as value drivers
The royalty interest value relies heavily on the present value of projected future cash flows, which are a portion of production revenue. Also, the operator’s revenue depends upon price and production variables. Therefore, when calculating the royalty interest, determine the future production potential of a well, and factors that affect the price.
The impact of the decline curve in production
As oil drilling investment firms extract minerals from the ground, production decreases with time. Different wells have different decline curves which impact the production process. The curve determines how mineral production is to be carried out and allows drillers to determine the Estimated Ultimate Recovery of a well.
Estimate Ultimate Recovery (EUR)
EUR is the approximation of oil and gas that drillers expect to recover from a well by the end of a production period. EUR can also be referenced to a reservoir, basin, or will.
Many factors affect the decline curve. For example, if a company uses unorthodox methods such as hydraulic fracturing or horizontal drilling to extract oil, the decline curve becomes steeper. When calculating oil drilling benefits, it is crucial to know the EUR value because future production will impact the value of your royalty interest.
Many factors affect the decline curve. For example, if a company uses unorthodox methods such as hydraulic fracturing or horizontal drilling to extract oil, the decline curve becomes steeper. When calculating oil drilling benefits, it is crucial to know the EUR value because future production will impact the value of your royalty interest.
Effects of demand and supply on price
Local and global market forces have a direct impact on oil and gas prices. The industry is subjected to high price volatility. The characteristics and nature of the oil and gas market mean it is affected by numerous forces such as political and economic factors. For example, political factors affect consumers, producers and other crucial stakeholders that make up the global market.
However, companies can choose to sell their products at a discount or to the NYMEX due to product shortfalls or surpluses. So, it is imperative to understand how the local market works and performs. For example, Utica and Marcellus premier their natural gas to the NYMEX at discounted rates because of poor infrastructure around the region: poor infrastructure means it is difficult to transport gas out of wells.
However, companies can choose to sell their products at a discount or to the NYMEX due to product shortfalls or surpluses. So, it is imperative to understand how the local market works and performs. For example, Utica and Marcellus premier their natural gas to the NYMEX at discounted rates because of poor infrastructure around the region: poor infrastructure means it is difficult to transport gas out of wells.
Leasing or selling your mineral rights, which one is better?
Some mineral buying companies will offer you attractive packages to buy your mineral rights. Others will provide a small portion of accrued profits or better yet, royalties to lease your mineral rights.
Carry out due diligence on leases and sales to see the most common type agreement in your region. For example, if a firm usually leases land in your area and want to buy your mineral rights, then they know that you have a lot of minerals in your property, and want to lure you into signing away your portion.
In such a case, don’t sell the mineral rights. Moreover, evaluate the performance of the market and its future growth. Consider selling your mineral rights only when the prices are high, and lease when the rates are low.
Undeniably, you can make a lot of money from selling your minerals. However, it should not be your only consideration. There are other factors such as the environmental impact of production and noises from mineral extraction that you should consider.
Talk to an oil and gas expert or an attorney for professional guidance. You can contact United Exploration for more information. Lastly, nothing in this article is to be considered tax or investment advice. Please consult with your attorney and tax professional.
Carry out due diligence on leases and sales to see the most common type agreement in your region. For example, if a firm usually leases land in your area and want to buy your mineral rights, then they know that you have a lot of minerals in your property, and want to lure you into signing away your portion.
In such a case, don’t sell the mineral rights. Moreover, evaluate the performance of the market and its future growth. Consider selling your mineral rights only when the prices are high, and lease when the rates are low.
Undeniably, you can make a lot of money from selling your minerals. However, it should not be your only consideration. There are other factors such as the environmental impact of production and noises from mineral extraction that you should consider.
Talk to an oil and gas expert or an attorney for professional guidance. You can contact United Exploration for more information. Lastly, nothing in this article is to be considered tax or investment advice. Please consult with your attorney and tax professional.
