The amounts of money that change hands in mineral property transactions can be huge in comparision with the average person's financial experience. The total yield (lease + royalties) or mineral sale price can often exceed the value of the surface rights. Let's consider two examples:
Example A: A 100 acre property is completely underlain by a coal seam that is eight feet thick. The owner agrees to let a mining company remove the coal for a royalty of $3 per ton that will be paid upon extraction. Assuming a 90% coal recovery rate of 90% the owner would be paid nearly $4 million.
Example B: A 100 acre property is drilled for natural gas and the royalties will be shared by owners of a 640 acre unit that immediately surround the well. The property owner is to receive a 12.5% royalty based upon the wellhead value of the gas which at the time of production is $8 per thousand cubic feet. Assuming an average well production rate of 2 million cubic feet of gas per day throuthout the calendar year the property owner would be paid over $100,000 dollars for one year of gas production
Oil and Gas Rights
Mineral rights also include the rights to any oil and natural gas that exist beneath a property. The rights to these commodities can be sold or leased to others. In most cases, oil and gas rights are leased. The lessee is usually uncertain if oil or gas will be found so they generally prefer to pay a small amount for a lease rather than pay a larger amount to purchase. A lease gives the lessee a right to test the property by drilling and other methods. If drilling discovers oil or gas of marketable quantity and quality it may be produced directly from the exploratory well.
To entice the property owner to commit to a lease the lessee generally offers a lease payment (often called a "signing bonus"). This is an up-front payment to the owner for granting the lessee a right to explore the property for a limited period of time (usually a few months to a few years). If the lessee does not explore or explores and does not find marketable oil or gas then the lease expires and the lessee has no further rights. If the lessee finds oil or gas and begins production, a regular stream of royalty payments usually keeps the terms of the lease in force.
In addition to a signing bonus, most lease agreements require the lessee to pay the owner a share of the value of produced oil or gas. The customary royalty percentage is 12.5 percent or 1/8 of the value of the oil or gas at the wellhead. Some states have laws that require the owner be paid a minimum royalty (often 12.5 percent). However, owners who have highly desirable properties and highly developed negotiating skills can sometimes get 15 percent, 20 percent, 25 percent or more. When oil or natural gas is produced the royalty payments can greatly exceed the amounts paid as a signing bonus.
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