The United States is unique in that it is one of few countries – if not the only country – in the world that allows individuals and organizations to extract mineral commodities. In most places around the world, mineral resources whether discovered or not belong to the government, and it is the government that provides authorization to extract those minerals.
Here in the U.S., things are a bit different. Which states have mineral rights? Well, the easy answer is that all of them do! But there are a lot of complexities to understand. Originally, mineral rights were granted to those who controlled the surface rights, but over time, things changed. Today, mineral rights can be owned separately from surface rights—and with differing state laws, you’ll find different rules and regulations around the country. Since the most profitable investments are in places with larger shale plays or with oil and gas-rich basins, we’ll focus on some of the rules surrounding mineral rights in these areas.
- Rules and regulations on drilling and mineral rights differ greatly between states and even between town, city, and county regulations.
- It’s important to learn about the regulations in a given area before investing in mineral rights within that area because these regulations can affect the value of mineral rights.
- Forced pooling rules are an example of regulations that affect mineral rights value. Mineral rights in areas without forced pooling rules are less valuable because mineral owners can be blocked from drilling by neighboring properties.
How Horizontal Drilling Opened Up the US
Before the shale boom, most oil and natural gas were produced by vertical wells. These wells were mainly found in Texas, Oklahoma, and Kansas with a few additional hotspots in Wyoming, Colorado, the Appalachians, and elsewhere.
As horizontal drilling and production of oil and natural gas from shale wells took off, this opened up vast sections of the United States. Most of these reserves are focused throughout Texas and the central states with a heavy concentration in the Ohio Valley, Appalachians, and the Midwest.
With this new wave of drilling, a wave of new mineral rights rules and regulations swept the country, with some states more restrictive than others on both drilling and mineral rights regulations. Other states—like Oklahoma, for example—are very pro-drilling, which makes them an excellent choice for mineral rights investors.
Colorado: A Case Study on Horizontal Drilling Regulations
Colorado is one example of a state where mineral rights and drilling rules have become increasingly more complex. Recently enacted legislation handed over power to local jurisdictions, which means that towns, cities, and counties can now have their own rules governing oil and gas regulations.
This has set off a wave of local jurisdictions creating their own rules. Larimer County, for example, issued a 30-day moratorium on new oil and gas activity effective March 16. Other cities and counties have enacted setback rules that prohibit wells within certain distances of homes.
This wave of regulations may impact the value of mineral rights within Colorado, with areas that have more restrictive rules becoming less valuable while areas that are more pro-drilling see an increase in value.
What is Forced Pooling?
To understand forced pooling, it’s important to understand pooling in general. Oil and natural gas can move through rock, for one thing, and most of these mineral deposits are quite large, for another. When a well is drilled on one tract of land, it can drain oil or natural gas from neighboring tracts of land. In some areas, this means that neighboring tracts can issue a pooling order, which requires the well operator to pay royalties to owners of neighboring tracts.
Forced pooling occurs when there are neighboring landowners who may not want the mineral deposits beneath their land extracted. In areas without forced pooling, these owners can be “carved out” by operators so that they don’t receive proceeds from a drilling unit. In areas where forced pooling is applied, mineral owners can’t be carved out. They’ll be included in the process and will receive a minimum set royalty payment–or more, since it is possible to negotiate for higher royalties.
Forced pooling can also come into play when the mineral owner cannot be found. The interest is kept in suspense until the mineral owner can be located to receive payments.
Regulations surrounding forced pooling are subject to change, but more states than not have some sort of law in place that allows for forced pooling of mineral rights. These rules differ from one state to the next.
Oklahoma, for example, is known as an “enumerated options” state, which allows non-consenting landowners to choose from among various options that best fit their needs. In Oklahoma, one option is to receive lower royalty payments with no operations costs deducted, or another option is to choose to participate in well operation, thus sharing the costs and reaping a greater share of the profits.
There are also risk-penalty states, like Texas or Ohio, where non-consenting owners subject to forced pooling orders can elect not to pay for drilling costs. In many cases, mineral owners elect to go the non-consent route when they don’t have the money to cover proportionate costs for their share of the well. In a great many of these cases, the mineral owner has a lease agreement with the well’s operator or with another entity that is able to put up the money for the mineral owner’s share. This type of structure can get quite technical, with differing states having different rules.
Last, there are cost-only states like Arizona and Missouri. In these states, non-consenting owners are only held liable for production costs if extraction is successful and they bear none of the risk associated with extraction.
In general, states with forced pooling rules tend to be good for mineral rights investors. In areas where forced pooling isn’t allowed, things get a bit more tricky. Certain mineral owners may not consent to leasing their mineral rights to an oil company, and while this doesn’t stop drilling from moving forward, it can mean that a lot of extra groundwork must be laid in order to drill.
What This Means for Your Money
Investing in mineral rights can be a profitable venture—but it’s important to familiarize yourself with an area’s rules and regulations prior to making that investment.
Each state has different regulations, and some, like Colorado, go so far as to allow local jurisdictions to create their own regulations. Some of these regulations can decrease mineral rights values, but others, like Oklahoma’s forced pooling rules, can make mineral rights more valuable because they make it easier for operators to proceed with drilling.
These complexities are why it’s important to work with knowledgeable professionals when you invest in mineral rights. Become an Eckard partner to take full advantage of our experience within the industry.
Contact us today to learn more.