Although mineral rights are part of the bundle of rights that landowners hold in real property, most assume they have ownership, as they have no reason to think otherwise. That is until an oil and gas well is permitted in the area, and they are not approached for oil, gas, and mineral leases, while their neighbors receive such proposals. Owners then read their conveyance deeds, but may not be able to determine if mineral rights were reserved, and therefore remain unsure of where true mineral ownership lies. Disputes over mineral ownership are still commonplace in today’s world, so a crash course in mineral rights may be in order.    

Perhaps some historical context would be helpful. In America, when land was patented out of government ownership, often to new settlers in the area, the federal government generally provided full ownership of the land and all rights connected with it to new landowners to enjoy and control. This contrasts strongly with the practices of many foreign governments at the time, who opted to retain the mineral estate.  

Subsequently, as the land changed hands when families moved or estates were settled, landowners generally passed “all their right, title and interest” in the transferred property to the new owner. This practice is still common in most land transactions until landowners realize that unseen subsurface rights can be more valuable than the visible forests, water, crops, surface, and recreational space.

The most notable instance of this was in Pennsylvania on August 27, 1859, when George Bissel and Edwin Drake discovered and established America’s first commercial oil well, the “Drake Well,” which caused landowners to look for monetary value in subsurface areas never before considered.

During this time, landowners received proposals for the granting of oil, gas, and mineral leases on their property. In these instances, investors (lessees) provided cash signature bonuses to mineral owners (lessors), as well as notional annual rental payments in lieu of drilling oil and gas wells during the exploration period. In successful cases, non-cost bearing shares in the well’s oil and gas production served as landowner royalty. The lessee (investor) would bear all exploration and drilling costs, which often incur high financial risks, but may also reap high financial rewards in the case of success with a petroleum discovery.

For investors, oftentimes drilling exploration wells is a very high-risk endeavor, however, this is not unexpected in the business. Because landowners soon realized the possible value in mineral estates, they began to avoid leaving it behind. Dependent upon negotiations, land transactions gave grantors or sellers of property a reservation, often held in perpetuity, to retain part or all minerals.

Every state has different laws and regulations governing mineral reservations. For example, in Louisiana, minerals can be reserved for specified periods of time prescribed by state law, and if no drilling activity occurs on the tract, the minerals revert to the property’s surface ownership. In this instance, reserved minerals are not held in perpetuity.

A detailed title search of a tract is required in the county property records to determine who owns the mineral estate. This is separate from the title search for providing a certificate of title as part of a closing, which ensures sellers own the property being transferred to buyers. Conveying land is subject to prior reservations, including minerals, rights of way, and easements to protect and recognize any prior reservations in title. Conveying something one does not own is impossible, thus requiring conveyance to be subject to prior reservations, as found in a deed of conveyance. 

Minerals are often seen as important to the initiation of oil and gas activity. If investors, typically oil companies, are geologically interested in an area, they send petroleum land professionals, trained in title search and lease acquisition, to conduct title searches and purchase oil, gas, and mineral leases.

The mineral owner (not necessarily the landowner, depending upon the title search and whether any minerals were previously reserved) will receive a proposal for an oil, gas, and mineral lease, which may include a signing bonus as a cash payment and a non-cost bearing royalty share in future production. This would mean that the landowner would be paid upfront for the access to their minerals, as well as a royalty payment in cases where the wells are productive. 

Signature bonus amounts and landowner royalties are negotiating points, usually driven by prior oil and gas activity and competition from other companies buying mineral leases. This title work by petroleum land professionals gives insights to current landowners who may own mineral estates. 

The general rule in many states is mineral estates are superior to surface estates, meaning surface owners who do not own any mineral rights cannot prohibit oil and gas operations as set forth by state law. This is to say, the surface owner cannot prevent the mineral owner from drilling a well in order to develop their mineral rights. The rationale is that if surface owners have superior rights, they could prevent mineral owners from enjoying the benefits of the mineral property interest.

Typically, the minimum oil and gas royalty a landowner may be offered is 1/8th of production but could be as high as 1/4th of production, depending on prior drilling and production in the area. Signature bonus amounts vary significantly depending upon what the landowner requires and current market conditions, similar to the landowner royalty. However, cash signature bonuses are often payable on a per-acre basis, regardless of the results of any oil and gas drilling, and it can be a substantial amount for highly prospective areas with current oil and gas production nearby. 

Each lease allows lessees to unitize leases with other leases to form a unit, subject to approval by the state oil and gas regulatory body. In this manner, one’s interest in the oil and gas production income is proportionate to the amount the mineral interest bears to ownership of other mineral owners to the size of the prescribed unit.

Given that items that cannot be seen may have greater value than those which are immediately visible, at least in the eyes of interest holders, landowners who have granted prior oil and gas leases on their property may want to reserve minerals in any conveyance.

Buyers will be either reluctant to buy the property without some share of the mineral estate, or indifferent to this point, possibly focused on what they can see on the property like the land, timber, location, or crops, as the rationale for the purchase.

For example, a person purchasing tracts on the beach will likely be more worried about access rights to the beach and an ocean view over minerals. Similarly, a person purchasing land next to an existing oil and gas field likely is more concerned about the mineral interests than the breed of cattle to be placed on the property. 

For providing economic benefits to both parties in the conveyance of real property, some solutions do exist. This is assuming the seller owns the minerals, which may or may not be the case. The seller could retain minerals in the deed of conveyance, but alternatively, provide the purchaser with a share of royalty income from the tract. This would enable the purchaser to gain some economic benefit from future oil and gas production and allow the seller to retain the right to grant a lease and receive the cash signature bonus, as well as any royalty not otherwise conveyed to the purchaser in the transaction. 

This is often a good solution to situations where the minerals are a clear point of contention in the negotiations, as both parties will benefit in any future oil and gas production. This also takes away the fear of being left out with respect to any oil and gas production on the land. 

As with any real property interests and conveyances, it is best to consult with an attorney in the state in which the land is situated for advice and counsel, particularly if minerals are an important aspect of the transaction for the parties.