Effectively Monetizing your Mineral Interest
Determining the best way to monetize their minerals is a pivotal decision. Each of these alternatives can have drastically different effects and purposes. It is critical to select the best option for your own situation. That best option might not necessarily compatible be with what third parties may be attempting to persuade you to do. In this article, we will provide an unbiased overview of the options available to you and their pros and cons.
Mineral Sales and Royalty Sales
Due to substantial similarities, Mineral Sales and Royalty Sales will both be covered in this section. Mineral rights include all powers related to your minerals. This includes the right to sign a lease, receive a signing bonus, and receive royalties. Royalties are checks to the landowner for the sale of oil and gas. They are based on factors such as acreage, the price of oil and gas, and your royalty percentage. Royalty sales should deal only with the right to receive royalties. However, at times a mineral buyer may intentionally blur the lines between a mineral or royalty sale. Both types of sales are similar in that they provide massive, immediate influxes of cash. With both, this comes at the expense of a larger, longer-term revenue stream.
At times, buyers will tell landowners they are “only” selling their royalty rights. They may attempt to put landowners at ease, by saying that they will still retain your mineral rights. You should generally view such claims with suspicion. These royalty check rights are the most financially impactful rights associated with your minerals. Draining the land of oil and gas will deplete the value of these rights, often making the minerals worthless.
Mineral buying tends to be an extremely profitable enterprise for these buyers. Over the long-term, most oil and gas leases will generate far more money than a mineral buyer will pay out. This makes mineral sales a highly unappealing option for many clients. It is a short-term play, rather than a long-term investment.
When to Consider a Mineral Sale
Generally, we steer most clients away from the mineral buying option. However, there are a number of legitimate reasons why some clients could benefit. Receiving all funds up-front provides significant advantages for older clients and/or clients who are seeking to facilitate an early retirement. The funds can immediately impact your quality of life. In addition, intelligent investment of the mineral sale proceeds can help offset the loss of long-term royalty revenues. Waiting 15-20 years for a full pay out may simply be the wrong timeline for some mineral owners.
Another consideration is that oil and gas is an extremely volatile, boom and bust industry. An oil and gas bust will quickly terminate leasing activity. For example 2015, the bottom dropped out of the oil and gas market. An interest that might have been worth $600,000, suddenly became $250,000, almost overnight. Some owners no longer received serious offers to lease or sell whatsoever. Royalty checks dropped drastically as well. Prices did not recover until almost a full decade later. Volatility and risk are factors worth taking into account. Conservative investors may prefer to lock in a guaranteed, up-front benefit. Then, they can direct the funds into a more stable, more predictable investment vehicle.
Force Pooling
Landmen commonly use the threat of force pooling to pressure landowners into signing lease agreements. Force pooling is a procedure to force landowners into a lease written by the state. The driller will file an application once they have collected signatures from most of the landowners in a proposed unit. These units are typically 640 acre rectangles of land. In Ohio, the Department of Natural resources conducts these hearings. After the hearing, a hearing officer will issue an order, including standardized terms.
These terms include a disappointingly low, 12.5% gross royalty, and no signing bonus. The orders provide a limited amount of environmental protection. However, these protections are not as thorough, detailed, or customizable as an well-negotiated oil and gas lease. This can create serious problems and disadvantages, which often militate in favor of using a lease instead. However, for a select number of clients, force pooling can offer some advantages. Our firm occasionally recommends intentionally being forced pooled as an option to seriously consider.
When to Consider Force Pooling
However, there are some corner cases where force pooling could be worth considering, due to an obscure facet of the force-pooling process. While the royalty for a force pooled lease begins at only 12.5%, there is a possibility that the royalty can eventually escalate to an 87.5% share of the royalties generated from the well. There are two methods for this to happen. One, an investor can pay multiple millions of dollars towards the costs of the well, in order participate in the well as working interest owner. Mineral buyers and/or their deep-pocketed clients depend upon this investment opportunity. These buyers intentionally seek out minerals that are not subject to a lease for this reason.
Absent the ability to pay the expenses of the well up-front, the state of Ohio assesses a penalty of 200% of the costs to drill, test, and complete the first well, and 150% of the costs to drill, test, and complete any additional wells. After production from a well has paid off all these costs, then the force-pooled landowner has the legal right to receive this 87.5% royalty.
The potential downsides of this gamble are that the well may not be profitable enough to reach this threshold quickly (or at all). Second, the costs of completing, drilling, and testing the well can be difficult to verify or artificially inflated. Landowners must carefully monitor and track these costs and their production statements to verify when they should be entitled to the enhanced royalty.
However, in cases where a landowner is already trapped in a producing lease, and no signing bonus (or no significant signing bonus) has been offered by the driller, or in the unlikely event a landowner has millions of dollars in cash available, intentional force pooling could be a dark horse option to consider.
Oil and Gas Leases
Leasing is the most beneficial option for most landowners. The primary benefits are the degree of control and flexibility it offers in negotiations, and to strike a favorable balance between significant money up-front, and significant royalties over time.
Lease compensation typically includes a large signing bonus up front. While not as high as the price per acre on a mineral sale, receiving $3000, $6000, or $8000 per acre for fifty acres of land is still a significant quantity of ready cash.
A fair royalty percentage can also fluctuate greatly. A fair amount depends on the strength of oil and gas prices and proximity to proven reserves. Less valuable minerals or down-market pricing might see percentages of 15% or 18%. More desirable parcels and stronger markets can result in higher figures.
The other major benefit of oil and gas lease negotiations, is it provides the maximum opportunity to negotiate protections for your land and water. Elsewhere, we have written articles covering in greater detail some of the pitfalls to watch for in oil and gas lease negotiations. A capable attorney should be able to greatly increase the offers you receive, while protecting you from predatory and deceptive industry practices and environmental problems.
Briefly, it should not come as a great surprise to anyone that if toxic heavy metals and carcinogens used in the fracking process migrate into your well water, the loss of safe water to your home could have a devastating effect on your real estate value. Or, that the loss of 50-100% of your royalty checks due to malicious wording in your contract is something that is critical to avoid. If your land has timber rights or agricultural use tax benefits, there could be significant financial impacts to guard against, and very few landowners wish to accidentally provide gas storage rights to the driller, or to allow the driller to locate roads, fences, or other infrastructure on the land without landowner input. Providing robust protection against these types of issues requires specialized expertise and great caution, given the stakes at issue.
Hidden Dangers in Oil and Gas Lease Negotiations
Unfortunately, most landowners do not realize the types of issues that their lease ought to control. Neither do they have effective tools to detect the massive difference between the prices they are offered, and what the highest possible price might have been, until after they have already signed a lease written by the driller. This almost always puts the landowner at an extreme disadvantage on written terms. Very few landowners have full knowledge of what terms are negotiable, what they should ask for, and what the dangers are if they fail to use good wording in their contract.
For pricing, even in cases where landowners may speak with their neighbors and gather some knowledge of local pricing in the area, the price they receive often falls on the lower end of the spectrum due to a lack of forceful, informed negotiation, and due to a lack of sufficient competition from multiple, serious buyers. At force pooling hearings, drillers are required to provide the State of Ohio with information on the average price paid per acre. In one fairly typical hearing in 2024, they admitted to paying an average of $500 per acre as a signing bonus. At the time, this land was worth between $5000-$7000 per acre, properly negotiated.
What Difference Does a Good Lease vs. a Bad Lease Make?
The chief issue with oil and gas leases is the amount of value at stake. The value of the real estate, signing bonus, and royalty checks in contention can all be extremely valuable assets. Each can be drastically affected by the terms of the lease. Effective legal help should be able to more than offset the costs of any services they provide by substantially increasing your signing bonus and/or royalty.
An experienced attorney should be knowledgeable regarding commodity price fluctuations, able to research production from nearby wells, and should have a network of industry contracts who will compete against one another to generate the best possible price. They should also have knowledge of which actors within the industry are best avoided, due to questionable business practices. While a lease may be the best option for most mineral owners, the difference between a good lease and a bad lease is often six or seven figures in lost value or property risk.
If you have questions about which of these options may be the best fit for your situation, we would be happy to provide a consultation with an experienced oil and gas lawyer to provide advice tailored to your unique situation.
Greg
Greg is the founder of McCleery Law Firm, and opened his own practice several months after passing the bar. His primary areas of practice are oil and gas and family law. In the early phases of the Utica and Marcellus shale, Greg assisted both both major industry players and local landowners with title research, leasing negotiations, sales of minerals and royalties, and curative title work, and acted as the title supervisor for an oil and gas brokerage firm, overseeing all title operations and leading a team of experienced abstractors. Next, Greg focused on expanding the firm and adding new areas of practice, with an emphasis on family issues.