Investing in oil and gas Mineral Rights can be a high-risk venture and demands extensive knowledge on the subject. This article is going to help you gain in-depth knowledge on how to invest in Mineral Rights.
Introduction: What are Mineral Rights and how do they work?
The ownership rights to the underlying resources including fossil fuels (oil, natural gas, coal, etc.), metals and ores, and mineable rocks such as limestone and salt are referred to as Mineral Rights.
Mineral Rights differ from Surface Rights. While surface rights grant the owner the right to use the land for residential, agricultural, commercial, and other purposes, mineral rights permit the owner to exploit natural resources found underneath. The United States is one of the few countries that allow private ownership of minerals beneath the earth’s surface.
Owners of mineral rights can either use their rights to explore and exploit their property or sell their mineral rights to individuals or organizations to exploit and explore. Those who wish to sell can receive payment in the form of royalties, leases, or shut-in payments.
For this type of investment to be profitable, it is essential to invest in a mineral-rich area. In the United States, for example, Nevada, Arizona, Texas, California, and Minnesota are the top 5 Mineral-Producing States. In fact, a Fort Worth-based upstream oil and gas company known as Pheasant Energy is a great option for someone seeking mineral rights for sale in Texas.
Types of Mineral Rights
That being said, in order to make an informed decision, one must first understand the various types of mineral rights. These types include:
- Mineral Interest (MI)
This is the most common and straightforward type of agreement. It generally refers to the non-producing minerals, which means that the owner does not receive royalty payments as there are no oil or gas wells on the property.
- Royalty Interest (RI)
One of the most profitable mineral rights is royalty interest. It can be beneficial for both buyers and sellers to invest in oil royalties and gas royalty payments. It involves the extraction of minerals using an operational oil or gas well. Royalties on the sale of oil and gas are paid to the owner based on the owner’s decimal interest in the well. The royalty interest ends when the oil and gas lease expires. The mineral interest owner then has the option to re-lease the mineral rights.
- Mineral Interest / Royalty Interest (MI/RI)
This type suggests that the seller is selling both the mineral interest (often with executive rights) and the royalty interest. By buying both, you will still hold the mineral rights at the end of the existing lease.
- Overriding Royalty Interest (ORRI)
In contrast with mineral interest and royalty interest, overriding royalty interest has certain limits. In this case, owners are only entitled to royalties if production is taking place on a specific area of land. Overriding Royalty Interest (ORRI), like royalty interest (RI), expires when the lease is up.
- Working Interest (WI)
This is the only type of mineral right that requires the owner to pay expenses. These charges are mostly related to drilling into the land, running a well, and other activities and can be costly if the owner of the mineral rights is the one executing these activities. Nevertheless, working interest can be advantageous if the owner leases the mineral rights to a utility company as the corporation pays for any expenses linked to accessing the minerals in the soil. Royalties paid to the owner account for about 20% of revenue.
- Non-Operated Working Interest
This sort of mineral rights ownership is usually passed down by family members. It can also apply to individuals who own land and want to sell their homes but wish to keep a share of the mineral rights. A member with a non-operated working interest is not involved in day-to-day operations but is consulted on production decisions. After operational expenditures have been met, the well operator divides any remaining cash among those with a working interest, thereby providing a source of income.
- Net Profits Interest
Owning a net profits interest means that the owner only makes money when the land generates a profit. This sort of mineral right falls under the category of non-operating working interests. In this category of mineral rights, the owner has no say in the development or cultivation of the land itself. They authorize a utility company to mine and drill on the land and in the event that no minerals are unearthed, they are not compensated.
Benefits and Risks associated with Investment in Oil and Gas
It is crucial to weigh the advantages and disadvantages of Investing in Mineral Rights in order to decide if it’s the right investment opportunity for you.
Here are some benefits associated with Mineral Rights Investment:
- Investing in oil and gas can provide tax advantages, such as the percentage depletion deduction.
- Non-operated Working Interests offer certain other tax breaks like the ability to expense intangible drilling costs in the year they are levied and the ability to depreciate tangible drilling costs over a number of years. Furthermore, non-operated Working Interests are taxed differently, hence you may be able to offset other income with these expenses.
- Mineral Rights can be passed down to future generations.
Some Risks include:
- Political risks include domestic renewables drives and pressure to phase out the usage of fossil fuels.
- Geopolitical concerns, as well as global supply and demand, influence the price of oil and natural gas.
- Oil and gas investments are highly sensitive to the price of the underlying commodities and are subject to fluctuations, making them extremely volatile. This can be observed in the market meltdown in 2020 and subsequent price rebound in 2021.
Steps to follow when investing in Mineral Rights
Now that you’re caught up with the terms and know your options, let’s look into certain steps that could help you with your investment.
- Devise a Plan
Conjure up an acquisition strategy and a preferred site for mineral purchases. Mineral rights ownership is typically recorded in a separate deed book from surface rights. As a result, in order to determine who owns the mineral rights to a given property, you must visit the local courtroom. Additionally, it is recommended to appoint an expert to research the mineral rights and mineral potential of the area over which you already possess surface rights.
- Look up Mineral Rights available for Sale
To get a sense of what is available and see what fits your purchase plan, you can search auctions, sealed bids, negotiated sales, and mineral listings on various websites.
- Make sure to carry out your due diligence
Anyone purchasing mineral rights must conduct extensive due diligence. If you skip this step, you may end up with a terrible investment or being duped.
Once you’ve selected listings that pique your interest, do your homework by researching the property on the website of the state’s oil and gas regulatory commission. Examine the production, offset production, mineral location overlay maps, and drilling activity. Moreover, be sure to thoroughly go through the lease terms and learn about the laws that govern the rights. Each state’s mining rules vary, which in turn impacts the sale of surface and mineral rights. While the underlying principles of the laws are similar, there are slight variations. However, in some cases, the differences can be rather significant.
- Purchase the Mineral Rights
Once you’ve performed the due diligence and selected the best option, make your offer, or place a bid to purchase the rights. The conditions of the mineral rights agreement may vary as per the legal description of the property, the property’s access method, damage control methods, specific minerals that you desire to extract, and so on.
Even though buyers typically make the final decision on mining processes, the seller must be informed of what can go wrong and, accordingly, take control of the mining activities.
It is recommended to counsel an attorney with expertise in transfer and sale so that they can assist you with the critical component of negotiating the purchase of the mineral rights.
- Transfer Ownership
When someone buys land, they don’t always get the mineral rights with it. Consequently, transferring mineral rights is a critical phase in the process. People who purchase mineral rights through a broker, auction, or private sale sign a deed, which may contain the physical property as well provided the owner sold both together. However, if you merely want to buy mineral rights, you’ll need to sign a separate deed that lays out exactly what you’re getting. This deed also includes any specifics concerning percentages and royalties if the transaction is not an outright sale.
That about sums up the essential steps involved in the Mineral Rights Purchase process.
Final thoughts
Keeping all of this in mind, it is critical to meticulously evaluate all of your options and make an educated decision. While consulting an expert is recommended, you must also be well-versed in the mineral rights you possess or are planning to invest in. With adequate information and professional help, mineral rights can be a very lucrative investment as they can provide you with big net cash returns, passive income, and additional assets for your estate planning.