Imagine you buy a piece of land. It’s a beautiful property out in the country. And it just so happens that it’s also sitting on top of huge oil reserves. You think, Great news! I’ll be rich! Now what?
Wait, what are mineral rights, what are surface rights, and what’s the difference between them?
Not so fast. Just because you own a piece of land doesn’t necessarily mean you own the minerals under that land. First, you’ll need to make sure the ownership of the land came with the mineral rights as well, rather than just the surface rights.
Don’t worry, we’ll cover all that below. Read on.
- If you have mineral rights, that means you own the mineral resources found under a piece of land.
- If you have surface rights, that means you own the land itself, but not the minerals underneath.
- People with mineral rights can lease them to other companies and get paid royalties based on production. People with only surface rights can’t do that.
What Are Mineral Rights?
Mineral rights mean ownership of part or all of the mineral resources under the surface of a piece of land. Those minerals could be petroleum, natural gas, etc. And whoever owns the mineral rights could own the rights to all the minerals, certain minerals, or just a fraction of the minerals found on that property.
Typically, people who own the mineral rights to a piece of land can lease them to another company for extraction. When an energy company leases the mineral rights, they develop the minerals and pay royalties back to the mineral rights owner.
The tricky thing about mineral rights in the U.S. is that in states like Texas and Oklahoma, the mineral rights can be separate (“severed”) from the land itself (“surface rights”). That means that just because you own a piece of land doesn’t mean you own the mineral rights under that land, and vice versa.
What Are Surface Rights?
The term “surface rights” is what most people know as land ownership. When you buy a piece of property, sometimes you are just buying the land’s surface for housing, agriculture, livestock, etc. Keep in mind that in mineral-rich states, it’s very common to sell the land separately from what’s underneath the land (aka, the mineral rights).
So what happens if you just own the surface land? Well, imagine you own a farm or ranch. You can continue to work the land, build on it, develop it, and live on it. You just can’t profit from any of the minerals under that land.
One thing that might come up if you own surface rights is that the people who own the mineral rights might need to access the surface land to explore and extract the minerals. So they’ll need to come to an agreement with you beforehand to lease a portion of the surface for drilling operations. And if they damage the surface, they should compensate you for that damage.
If you own both the mineral rights AND the surface rights, you could add surface damage clauses to your lease agreements. These might include surface damage, no surface operations, location approval, no drilling within X feet, water clauses, or land reclamation. You could also negotiate equipment storage and takeaway, ingress and egress, saltwater disposal wells, etc.
Mineral Rights vs. Surface Rights: Defining the Differences
In some states, if the mineral rights and the surface rights are severed, the mineral rights owner is the primary owner. And if a gas company wants to inquire about a mineral lease, they would need to contact the mineral rights owner to negotiate. If they sign a lease, the mineral rights owner (not the surface owner) gets the royalties. In that sense, mineral rights have the potential to make much more money than surface rights alone.
Of course, when it comes to doing the actual drilling, that same gas company might need to make damage payments to the surface owner. And sometimes surface owners have rights to the pore space of formation (e.g. the rocks). So, though a surface owner can’t profit from royalties from the actual gas, they might factor into any negotiations about gas storage or saltwater disposal.
Another difference between the two is that when it comes to laws and even sales, mineral rights might take a bit more research than surface rights. Laws vary by state and by country. First-time mineral rights owners probably need to hire a professional to help them navigate the legal process.
How Do I Know if I Own Both Mineral and Surface Rights?
If you want to confirm ownership of your mineral and/or surface rights, you’ll need to hire a landman. Landmen can act as consultants to search for and obtain records of ownership, conduct surface inspections, and perform due diligence examinations before the purchase or sale of companies or properties. If you determine that you own mineral rights, a landman can also help you negotiate a lease with an energy company.
Advantages of Owning Mineral Rights
Although it might not be for everyone, owning mineral rights is something to consider if you have the resources to do so. Why? Owning mineral rights can be very lucrative, and it’s less risky than other forms of investing.
Let’s say you lease your oil rights to an oil company to extract and develop. The oil company would pay you royalties amounting to 12.5-25% of the revenue generated by the oil on that land. What’s more, the oil company would be assuming the risk for that oil production. Not you.
So back to the royalties. How much do royalties amount to? Back in 2012, it’s estimated that private owners earned $22 billion just in mineral rights royalties. And since that time, production on private lands has gone up quite a bit, which just goes to show that investing in minerals rights can make people rich. Very rich.
How This Relates to Money
It’s hard to imagine a world without fossil fuels. And since nations around the world still rely heavily on oil and gas to power their economies, why not turn that reliance into a tidy profit? Investing in mineral rights does carry risks, but can also be a wonderful way to increase your passive income through royalties, which you could then reinvest back into the mineral industry or in other investments options.
Here at Eckard, we aim to help you establish solid investment opportunities in the energy space so you can build an even more prosperous future. Contact us to learn more about opportunities to invest in mineral rights.