Offers to sell mineral rights should be considered carefully: Part 1
Landowners and mineral owners in Michigan are receiving offers to sell rather than lease their mineral rights. There are many things to consider both short term and long term when evaluating the sale of mineral rights.
For landowners who own mineral rights (mineral property), consideration of the value of minerals is generally an afterthought, particularly if there is no current mineral income. For those fortunate enough to live in an area of valuable mineral deposits, they have learned that mineral income can exceed the income from the surface if it is managed as a business enterprise.
Recently, mineral owners in parts of Michigan have been receiving offers to purchase rather than lease non-producing mineral property. These offers come in areas where oil and gas development is also beginning to occur. This article does not discuss valuation of producing mineral rights.
Defining Mineral Property
The Michigan DEQ brochure on mineral rights states that “mineral property can have several different forms. Mineral property includes hydrocarbons (oil, gas, and coal); hard rock minerals (gold, silver, copper and other metals); and other types of minerals (talc, bentonite, uranium, and others)”. Mineral property can also include potassium and commercial gases and can vary from state to state.
Potential sellers may be assuming they are only selling the oil and gas rights (hydrocarbons), which could be a mistaken assumption. If the sale contract does not state only the oil and gas rights, it could include every type of mineral or gas that is considered a mineral and encompassed in the definition “all”.
Michigan State University Extension recommends these considerations when evaluating the sale of mineral rights. Some of these are listed below:
- Be cognizant of what “partnering together” might mean in a mineral purchase offer. It might mean the buyer plans to purchase an undivided interest. When you split an 80-acre tract into two 40-acre tracts, you are dividing the property. When you sell an undivided interest you are selling a portion of the whole. The offer might be to purchase a 50 percent undivided interest in all mineral rights for $125/acre. This means that entity would receive 50 percent of all mineral income from 100 percent of the acres, potentially for eternity. To go one step further, in the sales contract the seller may unwittingly be assigning the legal authority to negotiate all mineral leases to the buyer.
- In the article “Survey indicates significant positive financial results from lease royalty negotiations: Part 2” the sample well produced $450,000 in gross income (25 barrels/day x 200 days x $90/barrel = $450,000) in the first year. A .125 (1/8) royalty based on gross income produced $56,250 ($450,000 x .125 = $56,250) for the landowner from the 40 acre tract, or $1,506.25 per acre. This indicates that if the mineral owner is fortunate enough to eventually negotiate and receive royalties that income can be substantial.
- Splitting the mineral estate from the surface estate provides no incentive for the new mineral owner to consider future mineral extraction impacts to the surface owner. Oil and gas companies often prefer dealing with a mineral owner that is also the surface owner because it reduces the number of owners they are working with.
- When a surface owner sells the mineral ownership, any control over the siting of future roads, drilling sites, tank batteries and other related facilities is lost.
Part 2 of this article will discuss the Dormant Minerals Act, who can legally sign a sales contract, income tax considerations of the sale vs. future opportunities to lease and receive bonus payments and other considerations.
Other articles in this series:
Offers to sell mineral rights should be considered carefully: Part 2