Advantages and Disadvantages of Selling Your Mineral Rights

Mar 09

The discovery of new shale gas regions over the past decade at various US locations plus the advancement in drilling technologies have led the U.S. Energy Information Administration (EIA) to confidently state that the decline in the volume of natural gas produced from existing shale regions can, and will be, offset by new ones. Even the International Energy Agency (IEA) was candid enough to say that the increase in natural gas production may end US’s reliance on foreign oil over the next twenty years.

Shale gas pertains to natural gas trapped within fine-grained sedimentary rocks or shale formations. These sedimentary rocks are abundant sources of natural gas and petroleum. According to the EIA, the top six regions in the US that produce all of the nation’s domestic natural gas needs, as well as about 90% more growth in oil production are the:

  • Eagle Ford shale in Southern Texas
  • Bakken shale region, which extends from North Dakota and Montana
  • Niobrara, which stretches across parts Nebraska, Wyoming, Colorado and South Dakota
  • Haynesville in Texas, Louisiana and Arkansas
  • Permian in Western Texas
  • Marcellus, one of the most extensive shale regions in the US and probably the second largest in the world. This shale area across Maryland, Ohio, West Virginia, Pennsylvania and New York.

Private individuals, whose properties will most likely be affected by the still widening drilling activities in the top six regions, are all frequently confronted by the same question: Will they be willing to sell their property, sell/lease their mineral rights, or would they just probably hold onto these? On its website, The Mineral Auction speaks about its connection with some of the best and highly respected business firms, which are willing to offer the best price for a property or, mineral rights – an amount more than enough to allow them to just sit back and relax for many, many years to come.

An offer to can go up to $12 million (maybe even higher, depending on where the property is located) for just one private owner – such an offer has already been made in the past. And when an offer is made, this means cash up front, which you can use to purchase another property, pay off your loans and, so, save you from applying for bankruptcy, or save for your children’s education or for your retirement.

A property owner may, otherwise, choose to sell his/her mineral rights but not his/her property (this is allowed in states where separate ownership of real estate and mineral rights is recognized). Whatever the case, whether it is to sell or just lease, there are advantages and disadvantages connected to each:

Selling mineral rights:

  • Advantages: cash up front; probable income stream in the future, that is, if the land yields natural gas or oil; and, the chance to bequeath the mineral right to heirs, by including this in the owner’s will.
  • Disadvantages: the need to pay sizeable amounts of taxes from mineral production income (which may vary annually due to differences in production level); and, the need to keep records of royalty plus reporting earnings for tax processing; and, loss of further benefits (such as royalties) even if the land proves to be rich in gas or oil.

Leasing mineral rights:

  • Advantages: since lease contracts expire, selling at a higher price after the lease can be done to the firm with the highest offer, that is, if the land is productive; and, payment of royalties, which can eventually exceed the amount to be paid in a sale, can be negotiated with the lessee, as separate from the lease payment.
  • Disadvantages: lease payment is much lower than payment on a sale and there may not even be up-front cash; if the land is not really productive, amount of lease will be reduced upon renewal of the contract; a lease contract will never be renewed, however, if the land does not produce anything at all.
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