mineral rights, what a scam!

[leasedfee]

Terrel,

I look forward to reading these. Two questions please:

1. You gave as examples some lease payments to the surface owners. I'm curious how large would such a parcel be and how much market value is the surface owner's interest?

2. When you appraise a non-agricultural real property and the title commitment or deed shows that the mineral rights were long ago severed or reserved, how do you describe and report this interest? E.g., "fee simple with severed mineral rights"? Or "fee simple" and use an Extraordinary Assumption, or "fee simple" and describe it elsewhere like where you discuss title issues or property rights conveyed. No doubt, most of us city appraisers have been simply calling this fee simple. There's no oil/gas in the suburbs of Denver and the State that voted down the Olympics in the 70s are not going to allow mining under their beige suburban masterplanned communities during my lifetime.

They produce oil or gas and the people living near them who don't have mineral rights, are not even awares of such.

The power company craftfully hides its electrical substations as warehouses in downtown Denver, and a huge cell antenna on the drive to Cheyenne WY is a giant buffalo billboard-sculpture.

When I worked on new SFR subdivisions, 1 to 1.5 hours north of Denver, I was troubled to see oil rigs in the middle of the proposed project. Then I noticed one-half of my comparables projects had them too. The homes sold for the same prices. Apparently people didn't mind; the subdivision developer even put a park in the radius setback, required by state and county law, and just fenced-in the oil rigs.

Folks ignored it for years outside the traditional oilfields. But the lack of mineral rights means you, the landowner, are not in complete control of your kingdom.

Too true, it is always good to remind ourselves that mineral rights are the dominant estate. Talk about not being in the control of your kingdom, our AppraisalForumite friends may be interested in the Lake Peigneur disaster, a most amazing video that more than illustrates your comment!
http://www.youtube.com/watch?v=dHol4ICeDoo
http://home.versatel.nl/the_sims/rig/lakepeigneur.htm

 

[murray stroupe]

RE; OilLease Payday

I don't know about Arkansas but strip mining in most states require only that they compensate the surface owner and that is a private negotiation which does not allow the landowner to be unreasonable nor can they stop the process...similar to eminent domain in that respect. As for oil and gas, minerals have the power of ingress and egress and can go onto any property that they have under lease, with or without the property owner's permission. I have personally been escorted into a location by guards and a friend of mine had a pistol stuck in his chest by a woman who was not only just a renter, but was behind on her rents by 3 months.
http://www.aogc.state.ar.us/PDF/Leasing%20Manual%202008.pdf
http://www.aogc.state.ar.us/PDF/Royalty and Surface Owner Bulletin.pdf



Further, some states have laws requiring subdivisions without mineral rights to reserve an open space sufficient to get a drilling rig in. In Long Beach and other communities, there are pump jacks and drill rigs you cannot even recognize as such. They produce oil or gas and the people living near them who don't have mineral rights, are not even awares of such.

I personally have worked on rigs that drilled in a drive in theatre. Another that occupied a lot on Cedar Creek Lake in E. Texas that was surrounded by houses.

Because some laws are old and on the books or the laws governing the controlling entity (the oil and gas commission, Corporation Commission, RR Commission, etc.) adjacent home owners may have less rights than they think. Until your legislature recently passed a bill requiring companies to consider off site properties, your state didn't even require landowners be notified when the drillers set up a location. Most did anyway and even offered some compensation in addition to damages, but they were not required to. Likewise, in many Western states, the old homestead laws allowed the government to keep the mineral rights. Under law, government mineral rights can be nominated for public leasing. An incident recently occurred in Utah where a man without the real means to make it happen, outbid the oil companies for a tract to keep oil companies from buying it. He is trying to raise the cash to pay for the lease in order to keep from being arrested for fraud. Obama is going to rescue him by taking back leases taken legally by individuals and oil companies. Despite the leases being for 5 years, they are now going to try and require that the companies drill the lease. Unfortunately, that isn't how oil companies work. They frequently have only modest information about these prospects when they lease. Further exploration (Seismic, geology, etc. - often called "G & G" - geological and geophysical) will allow the companies to rank all their acreage from lowest to highest risk. They obviously drill their best prospects first. When an acreage approaches the lease expiration, the company then has to make a decision whether it is worth drilling.

An example in Arkansas is that Chesapeake Energy leased by its own admission 1.1 million acres for the Fayetteville Shale play. It now believes that only 300,000 acres are potentially productive and they have about 15 drilling rigs working that area. Each rig can drill from 10 -15 annually and 'hold' 640 acres maximum. Since they own only a majority of acres (320 minimum), they are also drilling acres leased by others who join as minority partners. With most leases taken in 2005-2006, they are rapidly approaching the release date on a 5 year lease. They won't get it all drilled up in time.

Today, when oil reached $120 a bbl [the NYMEX price is not a "real" price in the field] a field with 100,000 of reserves has a gross capacity of $12,000,000. $2 mil goes to the lease holder, about 80% goes to the oil company on average. If a well can be drilled for $3,000,000, a few hundred thousand dollars worth of buildings or houses isn't going to be an issue. The company will pay for them in a heartbeat.

Folks ignored it for years outside the traditional oilfields. But the lack of mineral rights means you, the landowner, are not in complete control of your kingdom.

==================
If NYMEX price is $120 barrel, what would be 20% payment in your example, to lease holder??
Paid monthly?? Based on closing monh Price??

I see demand /average price is up for gasoline;
JAN compared DEC.

Probably field closer to refinery would be better bucks?

 

[Terrel L. Shields]

It is based upon the well head price and the current wellhead price depends upon what the buyer (refiner) will pay. The quality of the crude is a factor. So WTI (West Texas Intermediate) and Oklahoma Sweet tend to run pretty close to settled NYMEX price (which is a futures price not a 'real' contract price) But Dakota sour crude may have a price of 60% or even less than that. Typically Kansas crude oils will sell for about 80% of NYMEX posted price. Further, lease terms are important because some leases make the royalty owner pay for transportation costs, etc. what we called "post production" costs. Then the royalty owner is also subject to (in Colorado) a severance tax, a conservation tax, and a property tax, which are taken out of your check by the "first buyer" of the oil or gas. Depending upon your lease terms, you may get 12½% to 25% (1/8 and 3/16th being the most common) royalties. All lease terms are negotiable and there is no such thing as a "standard" lease although they try to claim it is so (obviously an oil company would love to standardize all leases so it wasn't such a logistics nightmare).

Once production starts, companies usually have about 6 months to get their affairs in order. You will get a division order. Say you own 1 acre in a 40 acre "unit", all parties in the 40 acre unit will get a pro-rated share no matter where the well is. So you earn your royalty percent of 2.5% of the proceeds. They will send you a DOI (division of interest) statement. Once you provide them your SSN then checks will arrive monthly or if very low production, quarterly or annually. (if you don't provide a ssn they either put your account in suspense or more likely, deduct 28% and send to the IRS.)

1 ÷ 40 x 0.125 (12½% royalty) = 0.00313 of the net proceeds.

So if oil is $100 a bbl NYMEX and your local price is 85% of NYMEX, ($85) and the well produces 500 bbl. of oil this month, $85 x 500 x .00313 = $133 before post production expenses and taxes (figure 5-10% off that). Say, it also makes gas. The gas price (again adjusted for Local prices) is $5.00 per thousand (M) CU. ft. (at standard temperature and atm. pressure) and it makes 30,000,000 per month.

30,000,000 ÷ 1,000 x .00313 = $93.90 less say 10% = $84.50 per month. So even a one acre parcel can generate some income. Since wells deplete, and that rate of decline varies from a few percent to 50% or greater per year depending upon the rock properties, the income will decline in time usually. In old fields secondary recovery and tertiary recovery methods will cause production to climb again...eventually though you pretty much wring all the oil out that you can get economically.

 

[murray stroupe]

Re ; Mineral Rights

Thanks Terrel;
that black gold lease may make up for the low rainfall [sometimes] & low cash ag rents in TX...........................................................

 

[Terrel L. Shields]

Working on an interesting property. It has a gas well on the property. The well is shallow (about 500'), owned entirely by the surface owner and it has 28# of static pressure. He has a properly installed regulator, etc. and heats his 3000 SF home with it. He figures it saves a bundle and is thinking about a gas heat pump to save even more. How would you value it? (i don't have a good answer, just a question.)

 

[leasedfee]

Terrel

Here is one way to analyze it, based on economic opportunity cost and life cycle analysis. Compare the benefit-cost of this owner's unique system versus a regular system.

How much revenue would they receive if they sold it on their open market, minus operating costs, royalty fees if any, minus the amortized cost of the equipment/installation over its life, minus value of owner's time (or price of a professional to repair), minus capitalized cost of non-reoccurring non-operating events like compliance, repair, education, legal, etc. Is their obsolescence because people might be turned-off from the headaches and fear of something atypical, novel, or complicated (I would)? Will other people be turned-on by being energy independent (very popular as little as 1-2 years ago)?

Compare this to the benefit less cost of the normal system used in the market. The differences between the net present value will be the benefit or the functional obsolescence of this versus that. (For the purists, if the life cycles between the two systems are different then they will require chaining of the PV series). Then take a step back from being overly mathematical. What pragmatic/simplistic analysis that a buyer and seller would consider -- "keep it simple." One MAI I know argues that people want to know, "Will I be warm in the winter; cool in the summer", and that's the extent of the market's appreciation for these things.

In the end, this particular property owner's system may not be that "free" after all? One guy I once met quipped, "F&@! free, it's too expensive." It's a great line to remember. TANSTAFL as they say in econ.