Oil well and/or mineral rights and their effect on value or marketability.

[MLayton]

I recently inspected a rural property believing it to be typical for the market. However, during the inspection, I discovered an oil well on the property that was not evident during my initial research. The property owner's grandson, my POC, initially stated that the property was not income-producing.

The majority of the land was wooded, with unclear structures visible in outdated and grainy aerial images. Upon closer inspection, I found an oil well. Subsequently, I contacted the homeowner, who explained that the well is one of six covered under a mineral rights agreement involving himself and two others, all sharing equal shares.

Despite investigating utility easements, none were discovered. I'm seeking advice from others who may have encountered similar situations or have insights on how to approach this regarding its impact on value or marketability.

 

[Terrel L. Shields]

Mineral rights are real estate, not easements. However, the oil company with a lease (you can find those filed as O & G Lease) gives the right to develop the minerals including the right of egress and ingress. The ownership interest is therefore, one-third the mineral so the estate can be described as fee in surface plus 33% fee in mineral or Fee Simple less 2/3rd the mineral right. By others having a mineral interest, you will probably need to either caveat away the minerals (I am appraising only fee in surface and not fee simple. Mineral rights are not included.) But first contact the lender and see how they want to proceed. Ask for a title opinion. I don't trust an owners estimate of their own portion. It might be a 50% interest in a 50% interest or 25%, not 33%. Or they inherited it along with 2 other siblings, etc.

You will find much of the mineral rights in oil country like SC Kansas are severed from the surface, so comps are very likely to not have any mineral rights to begin with. Your deed does not always say that.

Next if they want you to include the value of the mineral, the short and simple method is simply 3x the annual income to the subject interest. Otherwise, you need to contact someone who can value the mineral (usually valuing the total value and assigning one-third or whatever interest is there.) That's expensive and can run several thousand dollars in engineering fees.

For more info, go to my website. Minerals are my specialty. https://www.roxnoil.com/wpadmin/index.php/mineral-right-tips-for-appraisers/

 

[MLayton]

Thank you for your advice. It is greatly appreciated. I did reach out to the lender immediately following the inspection to make them aware and to see if there would be any issue with their lending policies and how they would like to proceed. Another appraiser I had discussed this with did mention that the severance of mineral rights from the fee simple estate is common in much of our area and that I might have to make note that the appraisal does not include mineral rights or surface rights only. I believe appraising the property rights of a "fee in surface" may be my best route. I will have to wait to see how the lender chooses to proceed. Thank you again and I have also found your website extremely helpful.

 

[Raven59]

I believe you need to address a couple issues. First, the ingress/egress for maintenance of the wells. Second, are additional well pads permitted. Third, will the presence of the wells meet market reaction or affect financing (FHA).

 

[MLayton]

There is a little unpaved drive running back to the well on the edge of the property. That is why I researched any utility easements. I will have to research if more pads are permitted. As far as market reaction, I have not completed a market analysis of that. The loan is conventional and I have reached out to the lender to see how this aligns with their lending policies.

 

[Raven59]

The unpaved drive is most likely used now for general maintenance. The concern is whether a significant repair is needed. Does it affect the privacy, utility, or safety of the property? The easement could diminish utility. Many purchasers in my area consider on-site gas wells an asset as they offset utility costs (free gas). You should address the well ROW easement and well pads on the overall value—positive, negative, or no influence.

 

[Terrel L. Shields]

If a tank is on the property, then they not only service the well, but load out the oil. And again, the egress will be recorded in the O & G lease. The Kansas Corporation Commission will have the records to determine the actual drilling unit. And they work in concert with the Kansas Geological Survey. Typically the operator and holder of the lease has the option to expand the drilling into deeper or shallower zones although some rights may expire at the end of the term. Depends upon the lease terms and the KCC regulations. Kansas does not have forced pooling but does have something called Unitization. Too complex a subject to explain here but basically, all parties in a field are pro-rated all the production, so if the field is 1,000 acres and the owner has 100 acres, they are due 10% of the royalty in the unit. The unit can be much larger than the owners part. Also, many old fields are water flooded. One well pumps water back down the hole to push the oil to other wells surrounding it.

https://www.kcc.ks.gov/oil-gas/oil-gas-faqs#faq2