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When the Oil or Gas Company Comes Knocking: Understanding Your Mineral Rights and Options

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You don't just own a piece of property—you own what's underneath that property as well, and that includes the rights to any precious minerals that are there. Many property owners find themselves approached by companies that are interested in buying their mineral rights. Should you sell? What are the things that you should consider first?

What are your options?

You essentially have three different options when it comes to your mineral rights:

  • Hold onto them and leave the surface property and mineral rights intact.
  • Agree to lease your mineral rights instead of selling them outright, which could provide royalties if and when there's actual production by an oil or gas well.
  • Agree to sell the mineral rights and take the lump sum that's offered.

Each of these options has different benefits and drawbacks.

Why should you consider keeping your mineral rights?

Unless you are dearly in need of the money, doing nothing may be the best option if you like your property the way that it is. If you lease or sell your mineral rights, you have no control over where the oil or gas company might eventually drill, and that could leave you with an eyesore on your property that you don't want to see.

Actually selling the mineral rights could also hurt your ability to sell the surface property in the future—buyers may not be as interested in a property that's already had its mineral rights sold. 

Should you consider leasing your mineral rights?

A lease usually gets negotiated based on the size of the property in question and a royalty fee for each month that there is a successful production of any oil or gas. The royalty is usually a percentage of the fair market value of the oil or gas that's produced from an active well at the time of production. It can provide a nice, long-term benefit and supplemental income to your family for a number of years, which many people find attractive. In addition, it eventually expires, leaving your surface property rights and mineral rights intact again, so that you don't have to worry about how future buyers might react.

However, giving a lease on your mineral rights means that you aren't in control of when (or even if) the oil or gas company actually ever drills. There's also the possibility that they'll drill and the well will come up dry. It's also possible that the oil or gas company may decide that market conditions make it better for them to sit on the rights, rather than pouring more oil or gas into an already glutted market. If that happens, you won't see any royalties at all, and you can't renegotiate with another company until the lease—which is often a decade or longer—expires.

Should you consider selling your mineral rights?

While the negatives of selling your mineral rights were mentioned earlier, there are some positive aspects to selling mineral rights. When you negotiate for an outright sale, you take no risks. You can often receive a generous lump sum in exchange for the mere possibility that the oil or gas company may want to eventually drill. If market prices drop, you won't need to worry. If the well turns out dry or there's another reason that actually tapping into whatever oil or gas is there turns out to be too expensive to make it worth the company's investment, you still get to keep the money you were paid.

The right answer to the question about whether or not you should even consider the offer to sell or lease your mineral rights often depends on your personal situation and goals. However, if you seriously consider the offer, you should consult with a real estate attorney to make sure that you are making the choice that makes the most sense for you and that you fully understand the way it could affect the value of your property in the future.