Many folks have benefited from the expansion of oil and gas exploration and development in Northern Colorado. There are several elements to this opportunity that need to be understood.
Ownership of land does not necessarily mean the landowner owns all the subsurface rights. A determination of the subsurface or mineral interests must be made. It is very common for a prior owner to reserve (retain) the mineral interests or some portion when the property was sold. Those interests remain and can be through several or more ownerships ago. Thus, the first things to be determined is the mineral interests that are available to the current owner. This is always done by the Oil and Gas company when they are interested in a particular property.
The Landowner should conduct their own investigation through the title insurance policy they received when they bought the property. It will reveal the existence of any mineral interest which were reserved and not conveyed by a prior owner.
Royalties or Sale
Once it is determined the owner has mineral interests, the negotiations commonly begin with an oil and gas company. The more showing of interest by an Oil and Gas Company or “flippers” (Companies that buy the interest then later sell it, with no interest in actually drilling), suggests there is oil and gas activity in the area. Depending on the activity, there can be multiple solicitations from a variety of companies seeking to acquire the mineral interests.
The interest can take two forms: royalties or sale. Royalty commonly consist of an upfront number and a percentage of drilling income. The actual amount is very negotiable, and owners should consult with neighbors/nearby landowners and others to learn the current royalties.
A more common practice is for an oil and gas company (not necessarily the drilling company) to purchase the owners oil and gas interests. This in turn has two variations: certain land owners have royalty interests. Oil and gas companies purchase the royalty interest from the owner and in turn then receive the royalty payment from the drilling oil and gas company. This is very common, and the mineral interest purchase price can vary as much as $500-20,000 per acre.
Some folk really like this approach because they can get a large upfront payment, rather than a payment (although potentially larger) over time. Obviously, the oil and gas companies believe they will receive a greater return over time, hence their interest.
Another situation is when there is no royalty agreement and no drilling activity in the area. This presents more of a risk to the oil and gas companies or flippers, and the price are generally lower.
A variance on the royalty/sale scenario is a partial sale, whereby the owner retains a portion of the royalties and sells a portion. Some risk (royalties), but some certainty (partial sale).
Price is the major unknown in these negotiations. “Shopping the deal” is an opportunity, given the enormous amount of drilling activity in the area. Drilling companies don’t want other companies to know what they are paying, but prices have become common knowledge.
We can help folks through this minefield hopefully to benefit from opportunities that have only really appeared in the last 5-10 years.