Selling Your Mineral Rights – –
Questions You Should Consider First!
By: Dick Emens & Sean Jacobs
As Ohio’s Utica/Point Pleasant Shale continues to be explored and developed by many large oil and gas exploration companies, eastern Ohio landowners are finding their oil and gas mineral rights to be a very valuable asset – – and many landowners are receiving offers to buy the oil and gas mineral or royalty rights in their lands for thousands of dollars per acre. We have spoken with numerous landowners who are considering selling some or all of their oil and gas mineral or royalty rights and believe landowners should consider a number of factors when making this decision including the following:
1. What mineral rights are you selling—oil and gas, coal, sand and gravel, limestone, iron ore, etc.? Most mineral buyers in Ohio are primarily interested in the oil and gas mineral rights and not all the other mineral rights. Landowners should consider selling only the oil and gas rights rather than all of their other potential mineral rights beneath their property.
2. What formations are you selling—just the Utica/Point Pleasant Shale or other formations? Most mineral buyers in Ohio are interested in the development of the Utica/Point Pleasant Shale. Landowners should consider selling only the oil and gas mineral rights in the Utica/Point Pleasant Shale and keeping all the other formations.
3. Will you be selling the entire mineral interest or a just a fractional mineral interest—selling 100% of the minerals or just a fraction like 50%? To date, there has been limited production from Ohio’s Utica/Point Pleasant Shale and the estimated value and probable reserves of this Shale is rather speculative. Landowners should consider selling only some of the oil and gas rights rather than all the mineral rights. Landowners should also consider, if they sell only a fractional interest in their minerals, if they are going to retain the executive rights (the right to lease all of the minerals in the future) or not.
4. Will you be selling a mineral interest or just a royalty interest? Mineral buyers in Ohio are looking for a long-term passive income stream from the royalty payments. A landowner may consider retaining the actual mineral interest and selling only the royalty interest in the minerals.
5. Will you be selling a mineral/royalty interest forever or for a specific term? Rather than selling the mineral or royalty interest forever, a landowner may consider selling the mineral or royalty interest for a specific term and after that term expires the mineral or royalty interest reverts back the landowner or their successors and assigns.
6. What are the potential reserves and value of the minerals being sold? As stated above, some landowners are being offered thousands of dollars per acre to sell their mineral rights. Landowners should try to value the minerals being sold. Landowners may consider hiring an independent geologist and/or petroleum engineer to conduct a potential reserve calculation.
7. What is the difference between the amount of compensation being offered for the sale and the potential long-term value of the minerals being sold? Landowners should consider the purchase price of the minerals with the potential long-term value of the minerals being sold.
8. What are the tax consequences of the sale verses receipt of royalties? Landowners should consult with their accountants regarding the sale. Generally speaking, the sale of minerals will be taxed at capital gain rates whereas the receipt of royalties will be taxed at ordinary income rates.
9. Do you want a lump sum of money now or passive long-term income? By selling your minerals now, landowners will receive a lump sum of money upfront but likely will not receive any additional money for the development of those minerals. By not selling your mineral rights, landowners will receive royalty payments over the life of the wells drilled.
10. Will the sale affect your property taxes? Many Ohio counties have begun taxing the mineral rights and often the assessed value of the mineral rights is very substantial. Landowners should consider how a sale of their mineral rights may affect their real estate taxes.
11. What rights will the mineral buyer have to use the surface of the land? Prior to selling mineral rights, a landowner needs to consider what rights the mineral owner will have to use of the surface land. Landowners should work with an attorney knowledgeable about oil and gas when drafting the language in the severance documents. If this is not done carefully a landowner may be subject to later disputes (and at the mercy of court interpreatation) regarding the mineral owners rights to the surface.
This is a list of general considerations. Additional considerations apply to each individual landowners situation and we are happy to have an initial phone conference with you, if you wish, at no cost to you if you call Dick Emens, Sean Jacobs, or Craig Wilson at (614) 414-0888. Emens & Wolper Law Firm represents landowners only in Ohio and our attorneys have spoken about oil and gas matters to more than 8,000 Ohio landowners, and we represent hundreds of Ohio landowners in all aspects of Ohio oil and gas mineral law. More information about our law firm and our attorneys is available on our website at ewjjlaw.com.
NOTE: This article has been prepared for informational purposes only and is not legal advice. This general discussion of the law should not be used to solve individual problems and no person should act upon any information contained in this article with regard to their own unique factual situation without first seeking their own professional counsel knowledgeable in oil and gas law.