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5 Things to Do Before Signing an Oil and Gas Lease

5 Things to Do Before Signing an Oil and Gas Lease

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Oil and Gas Lease

If you own mineral rights and are considering selling them to earn cash or minimize your tax deductions, then there are a lot of things you must consider before striking a deal and physically signing all of the paperwork and documents. We’ve compiled a list of five of the most important things to think about and do before entering an oil and gas lease for oil and mineral rights or royalties.

1. Ask Questions

Are  you already familiar with the majority of the industry’s terminology? There are a lot of players in the oil and gas fields that are very experienced in their fields. If you are unsure about anything during the process of signing an oil and gas lease, asking questions is going to be the best way to get certified, professional opinions about your individual situation.

2. Be A Good Person

You may think that someone approaching you about your mineral rights is trying to take from you everything they can. This is simply not true, as most oil and gas lease agreements are agreed upon by nurturing a good relationship between all parties. Staying civil and acting rationally will help you get the most benefit in the partnership of your oil and gas lease.

3. Negotiate Oil And Gas Leases

This may be the most crucial part of signing a strong oil and gas lease. Everything is negotiable, so why not negotiate? Mineral rights and royalties are high-value assets, so it is important to get the best possible deal.

4. Know Your Worth

In any negotiation, it is very important to try and best estimate the value of your mineral rights and royalties. Depending on the kind of asset you own, you can estimate value by running a cost-benefit analysis of your producing mineral rights or surveying some of the production activity in your area to value your non-producing mineral rights.

5. Get as Much as You Can

In an oil and gas lease, there is often more than just a one-time cash deal. In order to maximize your future earnings, it is advised to explore special lease provisions. Having a bonus royalty for a small percentage of production can go a long way over an oil and gas lease agreement that can last for decades.

Conclusion

Ultimately, when it comes to signing an oil and gas lease, it is best to be patient and resist the urge to proceed quickly. Consulting experts and having a full understanding of mineral rights and oil and gas leases is the best way to ensure the best contract for all parties.

Oil and Gas Leases For Dummies 2020

Oil and Gas Leases For Dummies 2022

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Updated: July 25, 2022

Made for those who are new in this industry, oil and gas leases for dummies is a quick guide on some of the basic ins and outs of the industry’s most commonly asked questions. Below, we will outline some beginner-friendly information in order to give you a good foundation for understanding how an oil and gas lease works.

What is an Oil and Gas Lease?

An Oil and Gas lease is a common agreement between a property owner and an oil and gas company, giving the company permission and access to produce valuable minerals from the property owner’s land.

How Does an Oil and Gas Lease Begin?

More often than not, an oil and gas company will determine that a piece of land is likely to be a highly producing plot for oil, gas, or other valuable minerals. They will then approach the owner of the land and offer to lease it in order to explore and drill below the surface.

If you are a mineral rights or surface rights owner being approached by an oil and gas company that would like to lease your land, it is highly suggested that you speak to a professional before agreeing to anything. Doing so will enable you to earn the highest possible royalty from any oil or gas produced from your land.

When Does an Oil and Gas Lease End?

Although all contracts are different, most oil and gas leases follow a familiar format. Initially, there is a primary lease term with an ending date that is honored if the land is not actually drilled or producing minerals. If the land is being actively explored or mined, then the lease will go into its secondary term. In the secondary term, an oil and gas lease will end on a specified date or after a predetermined period of idleness such as 60 or 90 days.

Should I sign an Oil and Gas Lease?

As mentioned above, it is always best to consult a professional before signing an oil and gas lease. If you are a mineral rights owner and are approached to sell or lease your rights by an oil and gas company, you may be headed towards a profitable venture if you take the right steps to fully understanding your oil and gas lease.

oil and gas royalties

How do I Get Oil and Gas Royalties?

Are you interested in acquiring oil and gas royalty payments? Then you’ll need to know how you can get them. Oil and gas royalties are payments that a person or entity will receive. They will receive it if they own the mineral rights. Another way is if they assist in the extraction process of a piece of land. This land produces and sells valuable minerals. In this article, we will explain the two main kinds of oil and gas royalties. Additionally, learn how you can add them to your portfolio.

Royalties from Mineral Rights vs. Overriding Royalty Interests

There are two main kinds of oil and gas royalties: producing mineral rights and overriding royalty interests. The important difference to know between the two is that mineral rights ownership involves actually owning the subsurface of the land producing oil and gas, whereas overriding royalty interests are paid to people or entities that help produce the oil or gas itself.

How to Get Mineral Rights for Oil and Gas Royalties

There are three ways in which you can own mineral rights. You can buy mineral rights, inherit mineral rights, or receive them as a gift. If you purchase a plot of land in a fee simple estate, that means that you own your mineral (subsurface) rights in addition to your surface rights on which you can build. In some states, you may purchase the surface rights of a piece of land while another person or entity may already own the mineral rights below.

How to Receive Oil and Gas Royalty Payments from Mineral Rights

If you own mineral rights or a portion of a piece of land’s mineral rights, then you own a valuable asset. If that land has oil, gas, or another valuable substance extracted from its subsurface, then you will receive a portion of the profits when the minerals are sold. Usually, this comes in the form of a monthly payment. You can also sell your mineral rights as a way to earn a large lump sum.

How to Get Overriding Royalty Interests

You don’t own the mineral rights of a property? You can still earn oil and gas royalty payments in the form of an overriding royalty interest. Overriding royalty interests (ORRI’s) are also given a portion of the sale of extracted oil and gas, however, they are given to those assisting the in drilling and will disappear after the operation is over. ORRI’s are often given to geologists, brokers, landmen, and other people or entities that help bring minerals to the market.

finding oil on your land

How to Find Oil on Your Land

If you think there might be oil on your property, then grab your shovel and start digging. Just kidding, that’s not only ineffective, but could be potentially dangerous. In this brief article, we are going to go over the different ways in which you can find out if there is oil on your land as well as what to do if there is.

Hire a Professional to Find Oil on Your Land

In some rare cases, bits of oil may actually seep to the surface of a plot of land. If you are lucky enough to see some, then there is a good chance there is more oil below the surface. If you do not see any oil on the surface, but suspect that there may be valuable substances below, then there are two main types of professionals that can be consulted to help you reach a conclusion: geologists and geophysicists.

Hiring a Geologist to Find Oil on Your Property

A geologist is able to determine the possibility of oil beneath your land by examining the rocks around your property. Crude oil mainly consists of hydrocarbons, which are formed from decaying organic matter trapped in areas of porous or reservoir rock. A geologist will be able to determine the likelihood of hydrocarbons by performing a field test of the area you live in.

Hiring Geophysicists to Look for Oil on Your Land

If you’re looking for an even more advanced research method, you should consider hiring a team of geophysicists to search for oil on your land. Geophysicists use high tech equipment to study the physical properties below the surface of the earth. By sending and collecting data from a series of vibrations, geophysicists will likely be able to tell you whether or not there is oil on your land.

What to Do if There is Oil on Your Property

The United States is one of the few countries in which a landowner can profit from the discovery of oil on their property. If you suspect that there may be oil below the surface of your land, then you could be in for a big payday. The best course of action for you to take would be to contact a professional mineral rights broker in order to receive the highest possible royalty payment if an oil and gas company decides to drill on your land.

Overriding Royalty Interest agreement payment

Overriding Royalty Interest Definition for Oil and Gas

An overriding royalty interest is a type of royalty interest payment that is very common in the oil and gas industry.  In this article, we will explain what an overriding royalty interest is. Moreover, how it is different from a traditional royalty interest. Then lastly, how to determine the value of an overriding interest for oil and gas mineral rights.

What is an Overriding Royalty Interest?

An overriding royalty interest definition is the percentage share or derived value of an oil or gas production. This is payable by the working interest owner or lessee. Overriding these interests is often referred to as an “ORRI” or simply an “override.”

ORRI is usually set aside for geologists, brokers, or other entities that aid in the production of oil and gas. These were able to reserve an interest in the property by raising capital. Oftentimes, previous owners of mineral rights may own an ORRI as well. This is as a way to profit from future production of their former mineral rights.

ORRI vs. Traditional Royalty Interest

ORRI differs from traditional mineral rights royalties in a few different ways.  The most important difference is that ORRI produces payments strictly from the sale of oil and gas. This is rather than the property itself.

In a traditional royalty interest, the mineral rights or royalty owner will receive royalty interest payments. These are from the production of oil and gas. This is because they are the owners or partial owners of the mineral rights.  In an ORRI, the owner of the override does not own the mineral rights, and the ORRI will expire whenever the oil and gas lease ends.

What Determines the Value of an ORRI?

ORRI’s are largely subject to an individual case-to-case basis. The owners of the oil and gas lease sacrifice their production profits in exchange for services capital. This is to help a successful mineral extraction.  Overrides are not sellable to another entity after the oil and gas lease is over. The creation of any ORRI is on the finite term of the production process.

If you have further questions about overriding royalty interest agreement payments and more, feel free to reach out to us here.

selling mineral rights

The Pros and Cons of Selling Mineral Rights

Mineral rights are an extremely valuable asset to own in the United States.  Whether your mineral rights are currently producing oil and gas royalties or they have the potential to become a highly profitable extraction site, it is often difficult to make a decision as to should you sell your mineral rights or not.  In this article, we will define mineral rights and explore the benefits and drawbacks of selling your mineral rights.

 

What are Mineral Rights?

Mineral rights refer to the ownership of the subsurface of a property.  Mineral rights owners are entitled to accessing, extracting, and selling the resources below the surface of the Earth.  The surface rights owner can be entirely different than the mineral rights owner, which can be both one person, several people, or a larger entity.  The United States is one of the few countries in the world in which mineral rights can be bought or sold.

 

Should I Sell My Mineral Rights?

If you own producing mineral rights, then you are probably very familiar with the income owning mineral rights can provide.  Although you will no longer receive your monthly oil or gas royalty check, selling producing mineral rights can also be a great decision.

Perhaps you bought a fee simple estate in which you own both your surface rights and mineral rights, and someone has approached you with an offer to sell your mineral rights which are currently not producing.  In cases like this, there are also many pros and cons of selling your mineral rights.

 

Pros of Selling Mineral Rights

Selling mineral rights has the following advantages:

  • Instant Cash Lumpsu in Your Pocket
  • Less Taxes to be Paid Each Year
  • Eligible for a 1031 Exchange

 

Cons of Selling Mineral Rights

Drawbacks of selling mineral rights include:

  • No More Monthly Income (if your rights are producing)
  • Loss of an Asset that Could Increase in Value

 

Alternatives to Selling Your Mineral Rights

If you are interested in earning money from your mineral rights but do not want to sell them, you can consider leasing your mineral rights to an oil and gas company.  In a mineral rights lease, you will still own the mineral rights of the property and may receive oil and gas royalties from the third party’s production.  Mineral rights can also be gifted or bequeathed to another individual or entity.

 

Conclusion

Ultimately, the decision of whether or not to sell mineral rights is up to the mineral rights owner. If you are considering selling your mineral rights, then it is always best to consult an expert to help you earn a fair price and ensure that you earn as much as possible off of the sale.

fair market value of mineral rights

How to Determine the Fair Market Value of Mineral Rights

Mineral rights are the subsurface property rights that entitle a person or group of people to explore, extract and produce oil, minerals, and gases from a piece of land.  If you live in the United States, you may own a fee simple estate, which means you own both the surface and mineral rights of your land. Property mineral rights can be bought or sold independently. This is of the surface rights in many U.S. states where there are valuable resources below the Earth’s surface.  If you are thinking of buying or selling mineral rights, it is important to understand how to estimate the fair market value of your mineral rights, and it is highly advised that you consult an expert.

How Do I Determine the Value of My Mineral Rights?

Mineral rights transactions are rarely publicized. Unfortunately, there is no open marketplace in which you can quickly see the fair market value for your rights. There is one important distinction that must be made. This way, you can determine the fair market value of your mineral rights. Are your mineral rights currently considered producing or non-producing?

Producing Mineral Rights Vs. Non-Producing Mineral Rights

If you are receiving oil or gas royalties each month from the minerals being extracted from a piece of land, then you own producing mineral rights.

If the land that you own the mineral rights for is not currently having minerals extracted from it, then you own non-producing mineral rights.

Calculating the Value of Producing Mineral Rights

If you own producing rights, determining the fair market value of your rights is fairly simple.  You can conduct a cash flow analysis of the recent oil or gas royalties from the property. This is to easily see how attractive it may be to potential investors.  Other factors include the property size and the amount of geology explored or remaining. Producing mineral rights can generate immediate cash flow for an investor. With that, they are often valuable higher than non-producing mineral rights.

Calculating the Value of Non-Producing Mineral Rights

Finding a fair market value for your nonproducing rights is a bit more difficult than those currently being extracted.  In order to value your non-producing mineral rights, location is going to be the most important factor.  Are you in an area in which neighboring properties have been known to produce valuable minerals? Then your mineral rights will be quite valuable. Your property’s history, investment potential, and the current market value of your minerals is a factor. Yes, it will also be factored into the fair market value of non-producing rights.

Conclusion

Ultimately, if you are considering buying or selling your mineral rights, determining the fair market value of both producing mineral rights and nonproducing mineral rights can be quite complicated.  It is always best to consult an expert before making any decisions regarding the fair market value of your mineral rights.

oil and gas lease

How Does an Oil and Gas Lease Work?

An oil, gas, or mineral lease is a legally binding agreement between the mineral rights owner and the company bringing the oil, gas, or mineral reserves to the market.  Agreements between landowners and oil companies date back to before 1900, though the process is still generally the same.  Knowing the details of an oil and gas lease is crucial before agreeing to anything that is legally binding.

What does a Standard Oil and Gas Lease Look Like?

Although this is a valid question, unfortunately when it comes to mineral leases:  there is no standard. Instead, they are made up of different clauses and sections.  Here are the parts of an oil and gas lease that are most common.

Dates Clause

The dates clause establishes the date, time, and primary term of the lease.  This is included in every mineral lease.

Parties Section

The parties section lists the names of all persons bound to the lease.

Consideration Section

Here, the legal terms of the lease are outlined and made enforceable to all parties the lease pertains to.

Granting Clause

The granting clause defines the property and purpose of the lease.  It then goes on to grant the use of the property to the lessee.

Royalty Clause

The royalty clause is very important to the lessor, or the mineral rights owner.  Here, the percentage of the proceeds of extraction is outlined for the amount and means of payment.

Drilling and Delay Rental Clause

This clause will allow the lessee to defer the immediate use of the property.  Delay rental fees are also under definition here.

Dry Hole, Cessation, and Continuous Drilling Clause

If the land is not found to contain minerals (aka a “dry hole”), this clause grants the lessee power to cease production.

Pooling Clause

This clause allows for the lessee to pool together multiple losses in order to form one larger drilling operation.

Surrender Clause

Here, the rights to surrender the lease are in definition for the lessee.

Damage Clause

Liabilities of the Lessee are in detail in the damage clause if any significant damage is present to the property.

Assignment Clause

The assignment clause protects both sides of the lease so that either party can transfer the rights or ownership of the property with the outlined notice.

Force Majeure Clause

In this clause, the lessee has protection from nonperformance in the declaration that the lease is by state and national laws.

Warranty Clause

The warranty Clause is important, as it guarantees rights to the land to the lessee if the lessor happens to default on mortgages, taxes, or other obligations causing them to forfeit their ownership.

1031 exchange tax for dummies

1031 Exchange Tax for Dummies: Deferring Capital Gains Taxes on Mineral Rights

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Selling mineral rights or royalties is a great way to cash in on an extremely valuable asset. Whenever you choose to sell your mineral interests, however, the huge influx of cash is subject to a hefty capital gains tax. In order to maximize your earnings, read this “1031 exchange tax for dummies” guide and you can defer the capital gains taxes on your sale with a 1031 exchange for another qualifying property.

What Kinds of Property Qualify for a Mineral Rights Exchange?

So what qualifies for 1031 exchange? In order to qualify for a 1031 exchange to defer capital gains tax, sales of mineral rights must be exchanged. According to the IRS, it should be for a “like-kind” property. This means that you could obviously use your profits to invest in another mineral rights estate, or you could purchase another, similar property such as surface rights or real estate. Other types of property include:
1. Farms
2. Land
3. Businesses
4. Parking Lots
5. And so Much More

So basically, it is possible to 1031 exchange multiple properties as long as it is qualified. You just also need to process the legal 1031 exchange documents needed.

Avoiding Paying Capital Gains Taxes on Lesser Property

If you are using a 1031 Exchange to purchase new property with the sale of your mineral rights or royalties, it is important to note that the new property must be of equal or greater value to the sale of your mineral rights or royalties. If you choose to buy something of lesser value, the difference will be calculated and taxed.

The Benefits of a 1031 Exchange

Over $50 billion worth of property utilizes a 1031 exchange each year, but why? Well, by deferring capital gains taxes, 1031 exchange users are able to:
1. Maximize the amount of capital used to invest in new properties
2. Postpone tax payments
3. Diversify their portfolios without taxation

How to Begin a 1031 Exchange for your Mineral Royalties

A Qualified Intermediary is necessary for negotiating a 1031 exchange and the process can be grueling. Ranger Minerals have a team of representatives that are well versed in 1031 exchanges that can help assist you in maximizing the sale of your mineral rights or royalties.

Again if you have 1031 exchange multiple properties, make sure that you have all the 1031 exchange documents needed. Remember, who and what qualifies for the 1031 exchange are those with knowledge on how it works.

If you learn about this 1031 Exchange tax for Dummies guide, we have more in store for you. Reach out to us here.

mineral rights taxes

Mineral Rights Taxes: Do You Have to Pay Property Tax?

Understanding mineral rights is easy.  Understanding the taxes associated with mineral rights is a bit more complicated.  The short answer is Yes.  If you own producing mineral rights, then you must pay property taxes on them.  This is because, like surface rights, owning mineral rights means that you own real property, even if it is just a fraction of an estate.

You cannot go and “visit” your mineral rights property? Since it is below the surface of the Earth, it still exists, and therefore is taxed as property.  If you only own a fraction of the estate, which is very common, then you will only have to pay a fraction of the property tax as well.  The amount of taxes is based on the volume or the value of the minerals produced.

It is very important to note that in most states, this property mineral rights tax is only enforced when the property is in production.  When in production, the tax is only billed and collected once per year.  If you own non-producing mineral rights, such as the land below your suburban residence, there is a good chance that your annual property tax will not include an amount associated with your mineral rights.

Can I be exempt from taxes on my Mineral Interests?

Yes.  Standard property tax code exempts mineral rights owners from paying taxes on very small amounts.  The current threshold allows mineral interests valued below $500 to be exempt from taxation.

How do multiple property taxes work with an oil or gas lease?

If you own an oil or gas lease, chances are there may be multiple wells on the property.  Each well is considered to be a different piece of property and you will, therefore, have separate mineral rights taxes for each one.

If you have further questions related to the topic, feel free to reach out to us here.