Minerals 101

What are mineral rights and how do they affect me?

square-farmMineral rights are typically part of a mineral estate. Mineral rights grant the interest holder the right to sell and profit from mineral extraction.

Originally, most land was given by the US government to settlers. Through legal instruments, the government transferred interest in surface and mineral rights to the settlers.

As time went on, some surface rights were separated from the mineral rights. This is especially true in areas with significant oil and gas production like in Colorado’s Weld County and Adams County. In these locations, the surface interest is generally owned by one party whereas the mineral interest is owned by another. This separation of surface interest from mineral interest is accomplished through a conveyance or reservation of rights.

However, there are many land owners that may be farmers or cattle ranchers. Their families have been a part of the agricultural community for generations. They love the land and are dedicated to country life. As a result of their heritage, they may be owners of mineral rights as well as the property, and it is critical for them to make the most of the land whether it be through livestock, crops or mineral rights. Oil and gas production can coexist within an agricultural operation, enabling the family to realize the highest value of their assets.

Mineral rights include the right to all organic and/or inorganic material found in the ground- including both the surface and the depths beneath it- found within a specified piece of land. These organic and inorganic materials can be used at the discretion of the interest holder.

When it comes to extraction or production, there are regulations in place to protect all parties involved and to restore the land to an acceptable condition once the hardware is in place and the drillers move on to the next play. The permanent fixtures take up just a small portion of land and so the remainder may be fully utilized for crops or for livestock.

Terms Simplified

Minerals– Oil and Gas. When we think of the term minerals, we often think of rocks and vitamins. But in this context, the minerals that we are speaking of are oil and gas.

Mineral Estate This is a legal definition of what we call mineral rights. It’s your right to exploit oil and gas from a property, including letting someone pay you for access to do all of the work and return the land to an acceptable condition.

Royalty Interest This means a cut of the pie without being the baker. You own the oven, others pay for the ingredients & the labor, then give you a slice of what they produce. Once the baking-or mineral production-is done, you still own the oven, which is the Mineral Estate. Another baker- or gas producer- may come along in the future and give you another slice.

Overriding Royalty Interest– This is a cut of the pie, but only while there is production on a specific project. Once production stops, then overriding royalty interest expires.

Oil Play– This is an area where oil and gas can be extracted.

Location, Location, Location

 

Only some properties have deposits of oil & gas under the surface. Finding them takes effort on the part of skilled geologists and engineers. Just like old time silver and gold prospectors, there’s work to be done before they make any profit; and some spots don’t produce even after they’ve invested quite a bit of time and money. Even then, the land is restored.

This seismic vehicle is used to hunt for deposits of oil deep beneath the earth’s surface.

A word about fracking

Land Restored

When everything is in place, the land is restored

We all know that fundamentally sound words and practices that do a lot of good can be attached to rare incidents of careless damage caused by a few bad actors. Political manipulators use those exceptions to define an agenda at the expense of good folks who live by the Golden Rule. They scare honest people into believing in dangers that are not realistic. Fracking is one of those things. There have been hundreds of thousands of times where fracking was done properly. To this day, those wells provide both security to families and good-paying jobs to hard-working people.

Of course with any venture, you will have bad guys and tragic mistakes in early stages of development. Fracking has been around long enough for responsible companies and government agencies to develop safety protocols and advanced technologies to protect the earth and water for the people who depend upon it. The word “Fracking” comes from the term Hydraulic Fracturing, which is merely blasting an environmentally safe mixture of water, sand, and other molecules into a well at high pressure to crack open the rock and release the oil and gas. The early attempts caused some unforeseen problems that we know how to avoid now. When a project is completed, the impact is left with the smallest possible footprint.

The misperception about modern fracking is not unlike the views that some people hold about hunters. There are some who think that hunters are bad because they take wildlife. Those people don’t realize that hunters are great conservationists. An experienced hunter protects the environment, preventing overpopulation and damage to other plants and animals which in turn protects the very herds that they hunt.

Many of the people who work in the oil and gas industry are also hunters and fishermen. These hard working family men and women pursue a lifelong love affair with the outdoors. They care deeply about the health of the environment, and share a deep respect for all of nature, from the mountainous pine forests to the far-as-the-eye-can-see wild prairies. We work hard to ensure the great outdoors can be enjoyed for many generations to come.

The men and women out on the oil rigs are our friends and neighbors. They are the heirs of explorers and settlers who built this great nation, and they’re not going to cause harm to the places they love. They’re the kind of people we want to help us extract our mineral resources because they care about the land, too. They’re our partners who know how to do a job cleanly and safely, and they can sound alarms before damage is done.

A few bad apples early in the game soiled the image of America’s energy pioneers. Today, most frackers take every possible precaution to ensure the ground water is kept pure and the environment safe for future generations.

Am i sitting on a lot of money?

Striking rich with minerals.

It’s possible, but let’s approach this with caution.

Your mineral rights only become valuable when recoverable mineral deposits have been found. What that means is that the geology of the Earth can be tricky and man’s capabilities are limited even though fracking has expanded those capabilities in a safe manner.

Many people ask us why some locations have huge amounts of oil while others don’t. The reason is because of the way mineral deposits were formed and then trapped in some of the nooks and crannies deep under our feet. It all has to do with how the plates of the Earth’s crust moved and what materials were caught in the process.

Oil and gas deposits, also known as hydrocarbons, were formed from the compression of organic matter buried under layers of rock and trapped for millions of years. Many of the hydrocarbons we find today were part of prehistoric ocean plant life and ancient marshes.

Not every state in America has proven deposits of recoverable oil and gas, although most have at least some that can be recovered. And not all pieces of land within those  proven deposits have oil and gas beneath them. The locations that do are known as oil and gas plays where the hydrocarbons are stored. These are the mineral rights that have significant value.

Just because you do not currently have oil & gas production from your mineral rights does not mean oil & gas is not present. But until an exploration company decides to test your land, you may never see revenue from your mineral interest. The process can be expensive for the exploration companies, and everyone involved takes a cautious approach.

Oil & Gas Exploration Companies use 3D Seismic to explore new areas for oil & gas production. “Shooting” seismic is a costly procedure, but it is usually the first test that must be done to explore new opportunities for oil and gas production.

how can i get cash flow from my minerals?

pileofmoneyThe most common form of mineral extraction includes oil and gas production and coal. It can also include such rare metals as gold, copper, uranium, etc. For oil and gas production, a producer (also known as an Oil and Gas Exploration Company) must identify locations which they believe contain a significant amount of oil and/or gas in the ground.

Technologies such as 3-D seismic and stratigraphic testing are used to collect data to determine the presence of oil & gas reserves. Once data is collected, the information is then analyzed by geologists, engineers, and geophysicists.

After they determine a desirable location, producers must approach mineral owners to obtain a lease or buy the rights. The lease grants a producer the right to extract the minerals from the ground in exchange for a royalty interest. This royalty interest ensures a mineral owner receives a portion of the share of the profits from the production of oil and gas.

There are procedures for becoming involved in the process while protecting your best interests, and that’s how we can help.

What’s the risk?

Nothing in life is a sure thing, so you don’t want to depend on this to fund a lifestyle. But it can be a component in a sound investment portfolio.

Like every market, the oil and gas industry is exposed to constant change in supply and demand of its products. Factors such as international conflict, geopolitical events, domestic political activity, economic growth, weather, and travel behavior all affect the price of oil and gas. These ever-changing factors create unpredictable revenue from oil and gas production.

It is rarely a good idea to have all of your eggs in one basket. By depending on a certain amount of money from oil and gas production you leave yourself open to the risk of a drop in prices or termination of production. For example, in 2015 oil prices fell to more than half the value they were in 2014. This can be a huge stress on anyone who depends on revenue from production.

Other risk factors associated with oil and gas production include changes in regulations that affect when and where people can drill wells. These regulations may come from Local, State, or Federal authorities. Such regulations may be formed in ways that conflict with the intentions of superior existing laws that were carefully considered and responsibly written to protect the rights of all.

Some examples of this kind of political maneuvering was seen in the Colorado towns of Broomfield, Fort Collins, Lafayette and Longmont where fracking moratoriums were put in place by the municipalities. Often, this type of maneuvering is a result of political actors who feed on the fears of local residents. They claim to be interested in protecting the safety of residents and seek to limit production within a certain distance of structures.

But a deeper look at their efforts indicates that this is just the beginning, and their real goal is part of a nationwide political movement that is more closely aligned to ideology than it is to local concerns. In the initiatives proposed for Colorado’s ballot in the 2016 election, a total ban of fracking was proposed while claiming that the ban did not take away the rights of owners. Lesser measures were also placed that would have provided the political actors with incremental success that they would use to move closer to a total ban on fracking. All of the initiatives were defeated when it was realized that they did not have enough valid signatures to be legally placed on the ballot. We touch on the issue of fracking here, and will discuss it further in our newsletter.

It should be noted that a court is more likely to prevent you from extracting minerals if you haven’t begun the process. Once specific permits have been granted and production has begun, the owner of rights is in a substantially stronger legal position to continue with production. Courts typically view it as unfair to halt a project that has begun. But if you haven’t started work, they do not see a problem in denying permits until a complaint is heard. There are countless stories where activist lawyers have used these kinds of frivolous tactics to advance their agenda at the expense of decent people.

Also it’s no secret that many of the wells that have been drilled in this country were dry holes, with no products such as oil or gas extracted from the mineral deposits. Wells can also be shut-down due to operational issues or lack of sufficient production.

Though scientists may be able to detect the presence of minerals beneath the Earth’s surface, they cannot predict whether or not these minerals can be extracted with 100% accuracy. Geology is very much not an exact science. This is the greatest risk of the industry.

Do i lose my rights in a lease?

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Yes, but not really. When you sign a lease, you are granting certain rights to the lessor; that is the person or company who leased them from you. Whether you signed the lease, or the lease was signed by someone before you like a relative or previous mineral owner, you are bound to the conditions of the lease.

Most leases include the condition which ensures that the lessor has the right to produce and extract the specified minerals (i.e. hydrocarbons) until the production stops. Production can stop for several reasons, including an insignificant amount of minerals remaining in the ground, bankruptcy of the producing company, or failure to drill a successful well.

Leases can also end when producers fail to pay their bonus payments or the term of the lease expires before the well is drilled. Lessors can also violate the terms of the lease which can lead to its termination.

A lease is not a sale, you still own the mineral rights. But their value may be diminished because some of the oil & gas was removed. So you receive royalty interest and bonus payments to compensate for the change in value.

Have More Questions?

Get in touch with one of our team members today. We are here to help you get the most out of your mineral rights.

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Just to be clear

DISCLAIMER It is important for you to know that this website is provided for the benefit of summarizing information in a sensible, layman format. You should carefully research and read all documents. As with any major decision, we advise you to seek sound legal advice before you sign a deal.