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Understand your oil and gas rights

Is your land sitting over an oil or gas deposit? It may be that you have recently had a prospector approach you over acquiring oil or gas rights over sections of your property. You may just be wondering how to approach the negotiations that are entailed in the transfer of these rights.

Oil and gas issues are complex. It is best to discuss your issue with an experienced lawyer. However, below are few matters to become familiar with to better protect your rights.

Understand the difference between surface rights and mineral rights

The basis of any oil and gas rights transfers has at its heart the understanding between surface and mineral rights. While in most countries, all minerals are classified as government property, certain parts of the United States allow complete ownership of both surface and mineral rights to individuals and companies. This is known as fee simple estate or complete private ownership.

Fee Simple Estate/ Complete Private Ownership

As explained above, in a fee simple estate arrangement, the owner of the land enters a contractual agreement in which they may sell outright rights to another individual or a company. These may be both surface or mineral rights, one or the other, or just sections of the mineral rights, for example a seam of coal in part of the subsurface. The buyer will then acquire all rights to sell, bequeath or lease the same at any time without recourse to the original owner. This may have serious ramifications on subsequent generations that maintain the surface rights due to damages that may be sustained when mining commences.

Future reserve option

Due to the speculative nature of mining exploits, a further option has emerged. Rather than buy land outright, some speculators may offer landowners of tracts they suspect of having minerals a specified amount for particular mineral rights for specified duration. They may then offload these rights to others who are more prepared to commence drilling for oil or gas and are willing to pay a higher price. They then get to keep the balance of the differences between the two amounts. If the duration expires before they can attain such a prospect, the future lapses and the owner retains the amount originally paid.

Lease and royalties

Further still, a landowner of a prospective piece of land can negotiate a lease and a further option of royalties on oil or gas that is acquired. In this case, there is more flexibility on the restoration claims on surface properties that are damaged during mining. Further, certain sections of the land may be specified where mining will not occur. Royalties may be also be pegged to a certain amount per acre or a percentage of mineral obtained.

These are the main options that those in the process of buying or selling oil and gas rights may explore. Because most contracts pertaining to oil and gas rights are drawn up by lessees, it is paramount that you enlist the assistance of an attorney or mineral expert to help you navigate the often complex clauses that these contracts contain. This will often help you negotiate the best terms for your rights now and in the future.

1 Comment

My uncle owns a large chunk of land, and he is trying to decide what to do with it. I don't think he would want to do his own drilling, so leasing the land and and placing royalties on what is acquired sounds like a good option. Is it better to have them based an amount per acre or a percentage of minerals obtained? Does it depend on the price of the oil?

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