Mineral rights

Last updated

Mineral rights are property rights to exploit an area for the minerals it harbors. Mineral rights can be separate from property ownership (see Split estate). Mineral rights can refer to sedentary minerals that do not move below the Earth's surface or fluid minerals such as oil or natural gas. [1] There are three major types of mineral property; unified estate, severed or split estate, and fractional ownership of minerals. [1]

In the United States, a split estate is an estate where the property rights to the surface and the underground are split between two parties. It is the result of Homestead Acts such as the Alaska Native Claims Settlement Act (1971) or the Stock-Raising Homestead Act (1916). A split estate is similar to the Broad Form Deed, a type of legal document created in the United States in the early 1900s. These documents were used to sever property into mineral and surface rights, just like a split estate today.


Mineral estate

Owning mineral rights (often referred to as a "mineral interest" or a "mineral estate") gives the owner the right to exploit, mine, and/or produce any or all minerals they own. Minerals can refer to oil, gas, coal, metal ores, stones, sands, or salts. An owner of mineral rights may sell, lease, or donate those minerals to any person or company as they see fit. Mineral interests can be owned by private landowners, private companies, or federal, state or local governments. Sorting these rights are a large part of mineral exploration. A brief outline of rights and responsibilities of parties involved can be found here. [2]

Types of mineral estate

Unified estate

Unified estates, sometimes referred to as "fee simple" or "unified tenure" mean that the surface and mineral rights are not severed. [3]

Severed/split estate

This type of estate occurs when mineral and surface ownership are separated. This can occur from prior ownership of mineral rights or is commonly performed when land is passed between family generations. Today corporations own a significant portion of mineral rights beneath private individuals. [3]

Fractional ownership

Here a percentage of the mineral property is owned by two or more entities. This can occur when owners leave fractions of the rights to multiple children or grandchildren. [3]

Severed/split estate

Mineral estates can be severed, or separated, from surface estates. There are two main avenues to mineral rights severance: the surface property may be sold and the minerals retained, or the minerals may be sold and the surface property retained, though the former is more common. [4] When mineral rights have been severed from the surface rights (or property rights), it is referred to as a "split estate." In a split estate, the owner of the mineral rights has the right to develop those minerals, regardless of who owns the surface rights. This is because in United States law, mineral rights trump surface rights. [5] The U.S. historical precedent for this severance roots from western expansion and The Land Ordinance Act of 1785 and The Northwest Ordinance Act of 1789 at the cost of dispossessed Natives. [5] Severability was further reinforced by the Homestead Act of 1862 (OHA) and the 1862 Railroad Act. [5] Agricultural patents and the California gold rush of 1848 began placing lands that were mineral abundant into private hands and furthered the precedent of mineral rights outweighing surface rights. [5] This was a crucial step in the development of an economic system based largely on private incentives and market transactions. [6] An early case involving a property dispute between a father and son involving ownership of coal veins in Pennsylvania is cited stating; “One who has the exclusive right to mine coal upon a tract of land has the right of possession even as against the owner of the soil, so far as it is necessary to carry on mining operations.” (Turner v. Reynolds, 1854). A later case in Texas in 1862 set precedent by stating “it is a well-established doctrine from the earliest days of the common law, that the right to the minerals thus reserved carries with it the right to enter, dig and carry them away." (Cowan v. Hardeman, 1862). Some may argue that the U.S. justice system's enabling of this precedent is further exacerbated by industry lobbying which enables the status quo of favoring oil and gas development vs other innovations. [5]

Homestead Acts one of several related United States laws

The Homestead Acts were several laws in the United States by which an applicant could acquire ownership of government land or the public domain, typically called a homestead. In all, more than 160 million acres of public land, or nearly 10 percent of the total area of the United States, was given away free to 1.6 million homesteaders; most of the homesteads were west of the Mississippi River.

Gold rush new discovery of gold that brings an onrush of miners seeking their fortune

A gold rush is a new discovery of gold—sometimes accompanied by other precious metals and rare-earth minerals—that brings an onrush of miners seeking their fortune. Major gold rushes took place in the 19th century in Australia, New Zealand, Brazil, Canada, South Africa and the United States, while smaller gold rushes took place elsewhere.

This severability can create tension between mineral rights owners and surface rights owners if the surface rights owners do not want to allow the mineral rights owners to use their property to access their minerals. [7] This is becoming ever more present in the light of recent unconventional oil and gas development (UOGD) such as hydraulic fracturing due to technological advancement. [5] Problems include water pollution, fluid storage issues and surface damages. These are especially common in the West Virginia gas wells of the Marcellus Shale. [7] Often, companies will offer a surface rights owner a surface use agreement, which can provide financial compensation to the surface owner, or more commonly, offer some concessions on how the minerals are accessed. For example, some surface use agreements require the company to access the property from specific roads or points on the property.

A major issue that involves fluid mineral rights include the "rule of capture" where minerals that can migrate beneath the Earth's surface can be extracted, even if the source was another person's mineral property. [8] This claim is protected by the Board of Oil and Gas Conservation (BOGC) whose broader mandate is to promote conservation and prevent conflicts between mineral owners. [8]

Major elements

The five elements of a mineral right are: [9]

  1. The right to use as much of the surface as is reasonably necessary to access the minerals
  2. The right to further convey rights
  3. The right to receive bonus consideration [10]
  4. The right to receive delay rentals [11]
  5. The right to receive royalties

The owner of a mineral interest may separately convey any or all of the above-listed interests. Minerals may be possessed as a life estate, which does not permit a person to sell them, but merely that they own the minerals so long as they live. After this, the rights revert to a predesignated entity, such as a specific organization or person.

It is possible for a mineral right owner to sever and sell an oil and gas royalty interest, while keeping the other mineral rights. In such case, if the oil lease expires, the royalty interest is extinguished, its purchaser has nothing, and the mineral owner still owns the minerals.

Mineral rights leasing

An owner of mineral rights may choose to lease those mineral rights to a company for development at any point. Signing a lease signals that both parties agree to the terms laid out in the lease. Lease terms typically include a price to be paid to the mineral rights owner for the minerals to be extracted, and a set of circumstances under which those minerals are to be extracted. For instance, a mineral rights owner might request that the company minimize any noise and light pollution when extracting the minerals. Leases are usually term-limited, meaning the company has a limited amount of time to develop the resources; if they do not begin development within that time-frame they forfeit their right to extract those minerals.

The four components of mineral rights leasing are:

  1. Ownership
  2. Leasing
  3. The Division Order
  4. The Royalty Check


There are three distinct but related aspects of ownership. They are: [12]


To bring oil and gas reserves to market, minerals are conveyed for a specified time to oil companies through a legally binding contract known as a lease. This arrangement between individual mineral owners and oil companies began prior to 1900[ clarification needed ] and still thrives today. Before exploration can begin, the mineral owner (lessor) and the oil company (lessee) must agree to certain terms regarding the rights, privileges and obligations of the respective parties during the exploration and possible production stages.

Although there are numerous other important details, the basic structure of the lease is straightforward: in exchange for an up-front lease bonus payment, plus a royalty percentage of the value of any production, the mineral owner grants the oil company the right to drill for a period of time, known as the primary term. If the term of the oil or gas lease extends beyond the primary term, and a well was not drilled, then the Lessee is required to pay the lessor a delay rental. This delay rental could be $1 or more per acre. In some cases, no drilling occurs and the lease simply expires.

The duration of the lease may be extended when drilling or production starts. This enters into the period of time known as the secondary term, which applies for as long as oil and gas is produced in paying quantities. [13]

The division order

A division order is not a contract. It is a stipulation, derived from the lease agreement and other agreements, as to what the Operator of a well or an oil and/or gas purchaser will disburse in terms of revenue to the mineral owner and others. The purpose of the division order is to show how the mineral revenues are divided up between the oil company, the owners of the mineral rights (royalty owners) and the overriding royalty interest owners. The Division Order needs a signature, a current address and social security number for individual royalty owners or tax identification number for companies.

Oil and gas lease

An oil and gas lease is a contract because it contains consideration, consent, legal tangible items and competency.

Many other line items can be negotiated by the time the contract is complete. The rights of all parties are defined in agreements; and, when mineral production begins, the division order states how much revenue goes to each party involved. [14] [15]

Royalty check

Mineral owners may receive a monthly royalty check if oil, gas, or any other substances of value are extracted from below the surface and either sold or used by an oil and gas operating company. Royalty statements include the production and revenue figures for both the individual owner and the entire well. The royalty paid is a function of the net value of the proceeds from the sale of the oil, gas, or other substance, multiplied by the owner's revenue interest decimal, less any amounts deducted for taxes or other deductions. [16]

The revenue decimal used to calculate the amount of an owner's royalty check is calculated with the following equation: [17]

Revenue interest decimal

It is common for royalty checks to fluctuate between pay periods due to monthly changes in oil or gas prices, or changes in the volumes produced by the associated oil or gas wells. Additionally, royalties may cease altogether if the associated wells quit producing marketable quantities of oil or gas, if the operating company has changed hands and the new operator has not yet established a new payment account for the owner, or if the operating company or product purchaser is missing appropriate paperwork or proper documentation of changes in ownership or contact information. [18]

Surface use agreement

A surface use agreement (SUA) is a contract between a property owner and a mineral rights holder that dictates how the mineral rights are to be developed. [19] Meaning, when mineral rights are extracted by a company that does not own the property above where the minerals are located, the company has the legal right to extract those minerals regardless. However, companies will often enter into voluntary negotiations with the surface rights owner to ensure that the operations all go smoothly. In such cases, the company will offer a SUA, in which property owners may ask for financial compensation or other concessions regarding how the minerals are extracted. See sample. [20]

See also

Related Research Articles

An estate in land is an interest in real property that is or may become possessory.

Lease business contract between two parties, the lessor (owner) and lessee (user), for use of property

A lease is a contractual arrangement calling for the lessee (user) to pay the lessor (owner) for use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial or business equipment is also leased.

Closed-end leasing is a contract-based system governed by law in the U.S. and Canada. It allows a person the use of property for a fixed term, and the right to buy that property for the agreed residual value when the term expires.

Railway companies can interact with and control others in many ways. These relationships can be complicated by bankruptcies.

Mineral Leasing Act of 1920

The Mineral Leasing Act of 1920 30 U.S.C. § 181 et seq. is a United States federal law that authorizes and governs leasing of public lands for developing deposits of coal, petroleum, natural gas and other hydrocarbons, in addition to phosphates, sodium, sulfur, and potassium in the United States. Previous to the act, these materials were subject to mining claims under the General Mining Act of 1872.

Accounting for leases in the United States

Accounting for leases in the United States is regulated by the Financial Accounting Standards Board (FASB) by the Financial Accounting Standards Number 13, now known as Accounting Standards Codification Topic 840. These standards were effective as of January 1, 1977. The FASB completed in February 2016 a revision of the lease accounting standard, referred to as ASC 842.

A finance lease is a type of lease in which a finance company is typically the legal owner of the asset for the duration of the lease, while the lessee not only has operating control over the asset, but also has a some share of the economic risks and returns from the change in the valuation of the underlying asset.

Leaseback, short for "sale-and-leaseback", is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for fixed assets, notably real estate, as well as for durable and capital goods such as airplanes and trains. The concept can also be applied by national governments to territorial assets; prior to the Falklands War, the government of the United Kingdom proposed a leaseback arrangement whereby the Falklands Islands would be transferred to Argentina, with a 99-year leaseback period, and a similar arrangement, also for 99 years, had been in place prior to the handover of Hong Kong to mainland China. Leaseback arrangements are usually employed because they confer financing, accounting or taxation benefits.

In the field of commercial real estate, especially in the United States, a net lease requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by the property owner. These include expenses such as property taxes, insurance, maintenance, repair, and operations, utilities, and other items. These expenses are often categorized into the "three nets": property taxes, insurance, and maintenance. In US parlance, a lease where all three of these expenses are paid by the tenant is known as a triple net lease, NNN Lease, or triple-N for short and sometimes written NNN.

Oil and gas law in the United States is the branch of law that pertains to the acquisition and ownership rights in oil and gas both under the soil before discovery and after its capture, and adjudication regarding those rights.

A reversion in property law is a future interest that is retained by the grantor after the conveyance of an estate of a lesser quantum that he has. Once the lesser estate comes to an end, the property automatically reverts back to the grantor.

A habendum clause is a clause in a deed or lease that defines the type of interest and rights to be enjoyed by the grantee or lessee.

The South African law of lease is an area of the legal system in South Africa which describes the rules applicable to a contract of lease. This is broadly defined as a reciprocal agreement between two parties, the lessor and the lessee, in terms of which one, the lessor, binds himself to give the other, the lessee, the temporary use and enjoyment of a thing, in whole or in part, or of his services or those of another person; the lessee, meanwhile, binds himself to pay a sum of money as compensation, or rent, for that use and enjoyment. The law of lease is often discussed as a counterpart to the law of sale.

Genna-Wae Properties v Medico-Tronics (1995) is an important case in the South African law of lease.

The petroleum fiscal regime of a country is a set of laws, regulations and agreements which governs the economical benefits derived from petroleum exploration and production. The regime regulates transactions between the political entity and the legal entities involved. A commercial or legal entity in this context is commonly an oil company, and two or more companies may establish partnerships to share economic risks and investment capital.

In the oil and gas industry, a farmout agreement is an agreement entered into by the owner of one or more mineral leases, called the "farmor", and another company who wishes to obtain a percentage of ownership of that lease or leases in exchange for providing services, called the "farmee." The typical services described in farmout agreements is the drilling of one or more oil and/or gas wells. A farmout agreement differs from a conventional transaction between two oil and gas lessees, because the primary consideration is the rendering of services, rather than the simple exchange of money.

Lessor is a participant of the lease who takes possession of the property and provides it as a leasing subject to the lessee for temporary possession. For example, in leasehold estate, the landlord is the lessor and the tenant is the lessee. The lessor may be the owner of the property or an agent authorized on the owner's behalf. Commercial banks, credit non-bank organizations, leasing companies often act as lessors.

Real property legal term; property consisting of land and the buildings on it

In English common law, real property, real estate, realty, or immovable property is land which is the property of some person and all structures integrated with or affixed to the land, including crops, buildings, machinery, wells, dams, ponds, mines, canals, and roads, among other things. The term is historic, arising from the now-discontinued form of action, which distinguished between real property disputes and personal property disputes. Personal property was, and continues to be, all property that is not real property.

As a legal document, the broad form deed severs a property into surface and mineral rights. This allows other individuals or organizations other than the land owners to purchase rights to resources below the surface. These parties also receive use of surface resources-such as wood or water- to facilitate gathering the resources below ground. Based on English legal theory but an American creation from the early 1900's, the broad form deed was used by land and coal companies in many states within the Appalachian Region.


  1. 1 2 Fitzgerald, Timothy (January 2017). "Understanding Mineral Rights" (PDF). msuextension.org.
  2. Environmental Quality Council, The brochure reflects Montana law as ofOctober 1, 2013. (2013). "A Guide to Split Estates in Oil and Gas Development" (PDF). https://leg.mt.gov .External link in |website= (help)
  3. 1 2 3 Fitzgerald, Timothy (January 2017). "Understanding Mineral Rights" (PDF). msuextension.org.
  4. Fambrough, J., 2009. Minerals, surface rights and royalty payments. Real Estate Center, Texas A&M University, Technical Report 840
  5. 1 2 3 4 5 6 Ryder, Stacia S.; Hall, Peter M. "This land is your land, maybe: A historical institutionalist analysis for contextualizing split estate conflicts in U.S. unconventional oil and gas development". Land Use Policy. 63: 149–159. doi:10.1016/j.landusepol.2017.01.006. ISSN   0264-8377.
  6. Libecap, Gary D. "Economic Variables and the Development of the Law: The Case of Western Mineral Rights". The Journal of Economic History. 38 (02): 338–362. doi:10.1017/s0022050700105121. ISSN   0022-0507.
  7. 1 2 Collins, A. R.; Nkansah, K. (2015-10-07). "Divided Rights, Expanded Conflict: Split Estate Impacts on Surface Owner Perceptions of Shale Gas Drilling". Land Economics. 91 (4): 688–703. doi:10.3368/le.91.4.688. ISSN   0023-7639.
  8. 1 2 Fitzgerald, Timothy (January 2017). "Understanding Mineral Rights" (PDF). msuextension.org.
  9. "Mineral Rights 101 - Infinity Resources". www.infinityresourcesco.com.
  10. "Oil and Gas Lease Bonus". marcellusmineralowners.com. 17 July 2014.
  11. "delay rental - Schlumberger Oilfield Glossary". www.glossary.oilfield.slb.com.
  12. Stafford, Jim (1981). Look Before You Lease. Roar Press. p. 31.
  13. Wagner, Bret. "Introduction to Mineral Rights Leasing". Mineral Rights Coach. Bret Wagner. Retrieved 30 December 2012.
  14. "Lease & Division Orders - San Saba". sansabaroyalty.com.
  15. "Division Order – Understanding Oil and Gas Division Orders". www.mineralweb.com.
  16. "How to Read Oil and Gas Royalty Statements". Blue Mesa Minerals. Retrieved 5 August 2019.
  17. "Understanding Operator Royalty Checks". Caddo Minerals. Retrieved 6 May 2016.
  18. "Oil and Gas Royalty Calculator". PA Gas Lease Forum. Retrieved 19 Jul 2019.
  19. "Surface Use Agreements: What They Are and How To Get One - Texas Agriculture Law". agrilife.org. 20 January 2015.
  20. "Texas Sample Oil & Gas Lease and Surface Use Agreement - Earthworks". earthworksaction.org.