The complex legal nature of negotiating a mineral rights lease agreement can be intimidating to the landowner as well as smaller oil and gas companies who perhaps cannot afford the legal cavalry necessary to hash out a beneficial deal. Misunderstanding the terms of a deal, or failing to research the rules and laws that apply to each situation, can lead to an unsatisfactory outcome and a substantial loss in earnings potential.
A misunderstanding of the certain rights which accompany the ownership of land or minerals is one particular point of perplexity which can lead to an unfortunate outcome if carelessly navigated. As the Louisiana Oil and Gas Association (LOGA) notes, “Owning land does not automatically mean you own the mineral rights to a property. If your current deed does not specifically discuss minerals, you may need to contact a professional in title research.”
Each state also has its own unique laws and rules which can further complicate matters. For instance, “In Louisiana, mineral rights can only be reserved (held by the seller of surface property) for ten years, either from the date of sale or from the date of the last exploration activity or production of minerals from the land. If there is no mineral development on the property in that time period, the mineral rights then automatically transfer to the buyer.”
Mineral rights are certainly not to be confused with surface rights, which deal with the usage and ownership of land above ground. Conflicts arising between the varying interests of mineral and surface rights owners have produced a number of legal cases which have yielded important precedents regarding the issue.
A paper titled Minerals, Surface Rights, and Royalty Payments from the Texas A&M University (TAMU) Real Estate Center examined some of the more influential cases which set long-standing precedents for mineral and surface rights. As the paper notes, “One of the earliest and most significant cases decided by the Texas Supreme Court held that the mineral estate is dominant over the surface estate. The grant of the mineral lease gives the mineral lessee the implied right to use as much of the surface as is reasonably necessary for the exploration and development of the minerals.”
Furthermore, when the lessee is deciding how much or what region of surface land needs to be used for exploration purposes, “The surface owner’s consent is not required for this right to be exercised. The mineral lessee is liable for surface damages only in limited situations.” In other words, mineral rights will always trump surface rights in most situations, giving a considerable advantage to the holder of the mineral rights. It is imperative that both the seller and buyer in a mineral rights agreement understand the terms of their specific agreement and how it relates to the state and national laws which apply to general mineral rights agreements.
Another important precedent established by Texas courts posited the idea that an oil and gas lease gives the mineral lessee the exclusive right to initiate and complete various tests to ascertain the location of oil and gas on the premises. However, “Because an oil and gas lease is silent concerning how, when, and under what circumstances the tests may be undertaken, the mineral owner may wish to address these issues when negotiating an oil and gas lease.”
These issues should be addressed when a company initially approaches a mineral owner with a desire to conduct exploratory tests for minerals. The mineral owner has considerable power at the beginning of the negotiation process, and, based on the terms set forth in a lease or purchase agreement, can decide whether or not to give access to companies for the purpose of exploring the property for mineral resources.
“Permission from the mineral owner may be granted in one of two forms. The oil company may acquire an oil and gas lease that, among other things, grants to the lessee the exclusive right to explore. Or, the oil company may acquire permission only to conduct geophysical tests. If the tests prove positive, an oil and gas lease may be sought,” the TAMU paper notes.
Another front which warrants discussion is the differences between leasing and selling one’s mineral rights. Mineral Rights Coach notes that there is a very important distinction between selling and leasing one’s mineral rights. Selling offers the option to receive a large upfront payment regardless of whether any valuable minerals are discovered or not. However, this decision could mean sacrificing the option to yield a consistent income from future royalty or lease payments, which might eventually surpass the amount of initial funds received from an upfront sale.
On the other hand, choosing to agree to a deal with royalty payments also has its own risks, as there is no guarantee that oil and gas will be discovered within the region concerned in the mineral lease agreement. Of course, no one can be sure if there are minerals sitting beneath the surface before tests are conducted, so an individual must base this decision on their unique situation and needs.
A company should also consider these factors, as offering to pay a lump sum up front does not guarantee any sort of return on investment if the land does not produce any valuable minerals. However, it should be kept in mind that if minerals are found, the royalty check that will be going to the mineral owner will consistently be taking a cut out of the potential profits that could be derived from the drilling operations.
Navigating the terrain of a mineral rights lease or purchase agreement can be overwhelming to companies or individuals who may lack the necessary experience to determine what is considered a fair deal. The costs incurred upfront in order to avoid a future legal issue may seem burdensome at first. However, seeking out the proper legal representation can prevent significant financial headaches in the future, and it will usually prove to be well worth the cost if a reliable, trustworthy legal resource is found.