Selling Minerals and Retaining Surface Rights

Selling Minerals and Retaining Surface Rights

In 2019, most all of our Wyoming clients wanted to lease their oil and gas mineral rights. In 2020, perhaps due to financial hardships across the country associated with the pandemic, many of them changed their mind and asked LandGate to market their oil and gas mineral rights for sale. Roughly 95% of our Wyoming clients are farmers and ranchers. Their property has been in their families for generations and holds a lot of sentimental value. So those that want to sell their minerals have good reason to retain surface ownership. Let us talk about the concerns property owners should be made aware of when selling their minerals but retaining the surface rights.

First, will I receive more money for my minerals if I sell vs lease?

At closing, yes you will receive more money by selling your minerals vs leasing your minerals. Based on what LandGate has experienced in the Northern DJ Basin, mineral buyers are willing to pay a minimum of 3 times the amount of money to buy minerals vs. what you might receive as a lease bonus if you lease your minerals.

The DJ Basin on LandGate’s map.

Not all mineral owners are in the same financial position. Receiving a big check at closing is attractive. When comparing sell vs lease, a lot of things have to happen to make leasing more valuable. For example, in a lease, you will retain a royalty. This royalty could be extremely valuable IF the operator decides to drill a well, and IF the well is a producer, which MIGHT result in more wells being drilled on your minerals. So, instead of hoping for all the uncertainties associated with leasing your minerals, you may elect to sell.

I am selling my minerals and keeping my surface. What could go wrong?

If you sell 100% of the mineral rights under your surface, you must be aware of the potential pitfalls. The mineral estate is the dominant estate, meaning the owner of the mineral rights has just as much right to access and benefit from their minerals as the surface owner has rights to access and use the surface. The problem is that the mineral owner has the right to drill and develop their mineral rights or lease their mineral rights to a company for the purpose of drilling and developing. And where would all the drilling and development take place? On the surface!

Throughout history, there have been many surface owners who have answered a knock at the door, only to learn that an oil company has leased the minerals under their property and wants to begin drilling operations. Drilling operations could include cutting down trees, building roads across your property, digging pits, building a drill site pad that could cover several acres. What will happen to your crops and how will your cattle be protected from 18-wheelers and construction traffic on your property? Will the roads and pits be there forever? These are good questions. And we have a good solution.

Most all oil companies have staff that will meet with the surface owner to lay out a plan before operations begin. In many cases, the companies will build roads at locations where the surface owner might want to keep them. The oil company will pay for lost crops, build fences to keep livestock safe, and do their best to restore the surface to its original condition when done. It is especially important to understand that the beautiful ranchland you purchased to run cattle and raise your family, could eventually look like an oilfield. But this can be avoided.

Do Not Sell 100% of the Minerals

We suggest to our clients that they sell only a portion of their mineral rights. As an example, let us say you own 100% of the minerals under your 640 acre ranch. And you are being offered $5,000 per net mineral acre, for a total of $3,200,000. If you sold 90% of your mineral interest at $5,000 per net mineral acre, you would be selling 576 net mineral acres (640 x 90%) for a total of $2,880,000. In this case, you are receiving less money, but retaining control of the operations on your surface.

By retaining a mineral interest under your property, even if only 10%, the oil company now has to negotiate an oil and gas lease covering your 10% mineral interest. And as a mineral and surface owner, this is why you would retain a right to dictate what happens on the surface. You still cannot prevent the oil company from entering onto the property, but you are now in a position to negotiate surface use agreements or other such agreements that could provide for paying you to build drilling pads and roads, lay pipelines, use water, etc.

Whether you are a mineral owner, a surface owner, or a mineral and surface owner, LandGate can market your minerals and/or surface to get you the most money. At LandGate, we want to make you an informed owner. Give us a call. We look forward to answering your questions.

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This is not intended to be legal advice, but merely a discussion about potential conflicts that property owners should be made aware of. As rules and regulations vary from State to State, please seek legal advice to assist you in making the right decisions.

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