Mineral resource ownership

Individual ownership of minerals, as occurs in the United States, is relatively unusual. In most countries, most or all mineral wealth is controlled by the government. Although the United States government owns vast areas of mineral property, there is also a tremendous amount of privately owned mineral wealth.

Background

The identification of property, which includes both public and privately owned tracts, is made by several methods of land surveying and land notation. The history of an area frequently determines the method of measurement and mapping techniques. In Texas, for example, there is an entirely different method of land identification from that used in Alabama or Ohio. As far as mineral ownership is concerned, a number of additional complications are involved that do not exist regarding surface ownership.

Surface Versus Mineral Ownership

Much of the individually owned minerals in the United States have resulted from original U.S. government patents and land grants to institutions and private entities. Originally, most landownership concerned land in its entirety; this type of ownership was called “fee ownership” and implied both surface ownership and mineral ownership all the way down to the center of the Earth. Subsequent land transactions have subdivided fee ownership into smaller tracts as well as separating (“severing”) surface ownership from mineral ownership. It is also common to find private surface ownership overlying government-owned mineral ownership. The reverse is rare. Sometimes the government-owned minerals in areas of extensive mining activity have been inadvertently extracted because of confusion as to the rightful owner.

Mineral ownership can be nebulous and is not as closely defined and monitored in some situations as is surface ownership. As a result, even basic property tax obligations may be ignored through misunderstandings so that mineral property is often “orphaned” by rightful owners and can be secured by more knowledgeable individuals by paying the taxes due or otherwise convincing the local property assessor that they are in possession of the mineral ownership. The folklore of mineral property ownership is filled with stories of the incidental property transfer that leads to vast wealth for the acquirer through subsequent mineral extraction. Although surface property has been known to escalate to hundreds or even thousands of times its initial value, mineral ownership can result in a million or more times its original value through proceeds from minerals extraction. Yet the management of mineral ownership is often not of primary importance to the individual because its value is frequently misunderstood.

The separation of surface from mineral ownership often creates a unique set of problems. If mineral owners have the opportunity to have their minerals extracted, the consequence to the surface owner must be considered. In some states, the mineral owner has “primacy” such that reasonable access to the minerals must be provided; the surface owner must be compensated for damages resulting from mineral-extraction activities. In some areas where mineral extraction is not feasible from surface operations, such as in urban or environmentally sensitive sites, the fate of mineral ownership may be determined in courts of law.

Mineral ownership in many remote areas across the United States has minimal value because no identifiable commercial minerals are evident, or, if they are present, they are too far from markets to have value. In areas of extensive mineral extraction, such as traditional mining provinces or in oil and gas fields, mineral ownership is closely protected and its subdivision complicated. In these areas, the severance of mineral types, depths, and locations is common. For example, if multiple coal deposits exist from the surface to depth, the individual deposits may be identified as to ownership. In southern Illinois, for example, the many shallow coal deposits are exclusively reserved for mining, while deeper coal deposits are used for coal-bed methane extraction through drilled wells. In oil and gas areas, producing formations are identified and may be separated as to ownership. Frequently, a shallow oil and gas zone may be included in a lease along with deeper zones. A time limit is imposed on the development of the shallow zone such that it reverts to the mineral owner if not exploited. Oil and gas developers may be surprised to learn that they cannot exploit the shallow zone even after committing funds to it. Individual minerals may be separated as well, with coal, oil, natural gas, sulfur, metallic minerals, and industrial minerals being identified as individual entities.

Transactions and Appraisals

Mineral ownership can be exchanged through like-kind trades or exchanges for virtually anything of value. The appraisal of mineral ownership is a frequent activity but involves specialized training. Since many estates contain mineral ownership, the payment of estate taxes depends on an appraisal of the mineral ownership. As compared with surface ownership, which may often be appraised through comparable sales, mineral transactions may be so rare in some areas as to have no standard of comparison. This fact places an additional burden on the appraiser in arriving at an accurate evaluation.

Mineral ownership may be appraised by calculating a discounted present value of future revenues from mineral exploitation. If active mineral extraction operations are under way on a tract, projection of these activities into the future may be relatively accurate. If assumptions of minerals pricing and operating expenses are accurate, the appraisal of mineral ownership may well depend on discounted present value calculations.

Determination of Ownership

The determination of mineral ownership is similar to determination of surface ownership. Title searches are made by professionals who execute a study of the ownership history of a tract of mineral ownership. A chain of title is made to determine if any “clouds” on the title are indicated and to recommend remedies to these deficiencies. A title search may be very simple if the ownership is created from the original U.S. patent. It can be extremely complicated if the mineral ownership has been involved in numerous transactions, its ownership subdivided, and its minerals severed. No mineral extraction operation, such as mining or oil and gas drilling, is begun without a reasonable title opinion. Otherwise, the mineral exploitation is at-risk as to the payment of proceeds to the rightful owner as well as lawsuits from maligned mineral owners.

Disputes involving mineral property ownership are common and include boundary disagreements, geological misinterpretations, and depth disputes. Even the classification of minerals sometimes involves litigation. Mineral disputes can also be settled by mediation or arbitration in lieu of court appearances. The nature of dispute settlement may depend on the language agreed upon by parties in earlier transactions.

Wealth is created by mineral ownership transactions as discussed above, where trades may increase the value of the ownership. The greatest amount of wealth enhancement, however, usually results when a royalty from minerals extraction is negotiated. If the mineral deposit is large and valuable, the mineral owner can realize millions of dollars in royalties from mineral extraction. As an example, a coal deposit 4 meters in thickness contains about 18,000 metric tons per hectare. If a royalty is negotiated to be $3 per metric ton, the proceeds to the mineral owner are $54,000 per hectare. Only in developed suburban areas will surface property values be greater. Even greater wealth can be generated in areas where solid minerals as well as oil and gas can be exploited. This frequently occurs in the Appalachian Basin in the eastern United States as well as in the Rocky Mountains.

Mineral Leasing

If mineral leasing is desired, there are guidelines that govern most lease transactions. Mineral leases involve a mineral owner, called a lessor, and a mineral operator or intermediary, called the lessee. A mineral lease usually contains a primary term, bonus, and royalty rate. The term is the time extent of the lease agreement and can vary from one year to as much as ten years. Multiple-year leases may also involve delay rentals, or annual rental fees to retain the lease. Others are paid up at the outset of leasing, meaning that no delay rentals are due for the primary term of the lease. Some leases also have extensions past the primary term. Oil and gas leases usually specify that a lease can be held past the expiration of the primary term if commercial production has been established and is sustained with no cessation over a term, usually ninety days. stone and coal mining leases do not usually have a held-by-production clause, but rather provide for protection of future mining activity by using extensions to the primary term that can be unilaterally requested by the lessee with suitable advance notice to the lessor.

Lease bonuses are defined as the amount of consideration due to the lessor at the time of lease execution. This amount varies with the value of the lease, and it may be as little as zero or as much as thousands of dollars per hectare. In places where an oil and gas “play” is under way, lease bonuses can be in the thousands of dollars for land parcels no larger than town lots. On the other hand, tracts intended for pure exploration drilling (“wildcats”) may secure lease bonuses of only one to five dollars per hectare if anything. Governmental agencies, such as the Bureau of Land Management in the U.S. Department of the Interior, often demand larger than average bonuses because they may control the fate of mineral development.

The most important part of a mineral lease is the royalty. This is the income accruing to the mineral owner over the productive life of the lease. Royalty arrangements can be as varied as there are minerals and areas of the United States, but these arrangements often involve a percentage of the minerals produced. In times past, the royalty was paid “in-kind,” meaning that the royalty owner was issued the proportionate share of the mineral in the same form as the operator and could market or keep it for domestic use as desired. Modern operating practice, which usually includes long-term contracts for the marketing of minerals, provides the royalty owner with a percentage of the selling price. Royalty percentages vary from 2 percent of the selling price in the rock and stone industry to as high as 25 percent or even 30 percent in offshore oil and gas operations. Coal mining has royalty rates in the 5 percent to 10 percent range. In most cases, there has been a tendency for royalty percentages to increase over the past several decades. Another trend in mineral leases is for the royalty interest to bear certain expenses of operation, particularly if a very large development cost is necessary to jump-start the mineral exploitation. These are usually fees involved in refining or marketing the product.

Measurement of the bulk mineral or even the basis for its pricing are often the cause of litigation where the royalties are based on selling price. For example, if the mineral commodity is sold to an affiliate, a “sweetheart price” lower than fair-market value may result. Endless disputes over property boundaries and language in mineral conveyance documents, leases, and deeds have given rise to a legal specialty in mineral law and even to subspecialties such as oil and gas law.

Certain clauses in leases protect the lessor from a mineral operator making a halfhearted effort to develop the lease. One such clause requires timely development of the leased tract either through continuity of production or, in the case of oil and gas development, the steady drilling of new wells to prevent forfeiture of the lease.

Development Priorities

The question of mineral development priority frequently arises in areas having multiple mineral resources. Interference is minimized if the minerals in question can be recovered simultaneously. However, there are situations where the exploitation of a particular mineral commodity must wait until another is fully exploited. Examples of this include the extraction of near-surface minerals or the recovery of deep minerals where the exploitation of one would compromise the exploitation of the other.

Even relatively simple situations can result in expensive and time-consuming litigation. Some mineral ownership assignment documents specify the “superiority” of certain mineral commodities and place priorities on their extraction. If the purchase of mineral ownership is contemplated, the title search should reveal whether exploitation priorities are specified. As mentioned above, disputes involving mineral ownership and minerals development have been and still are quite common for a number of practical reasons. Inaccuracies in land surveying, the evolution of geologic nomenclature, the shifting of streambeds, and dishonest transactions all create discord. Attorneys and experts in mineral development team to convince regulatory agencies, courts of law, and mediators that the evidence supports their client’s claims. Sometimes, the evidence is clear-cut. Most often, however, a judgment decision is necessary where the evidence is far from perfect.

Measurements and Disputes

A classic type of dispute in oil and gas development involves the drilling of wells to drain underneath an adjacent tract. In the past, innumerable disputes concerned this “hot oil” problem. Modern drilling technology, with its downhole drilling motors, permits drilling a vertical well and then directing it to the horizontal in a prescribed radius of curvature, such that a well could be 1,500 meters in depth and its bottom could be 600 meters laterally from its surface location. These wells are “surveyed” by using dip and azimuth tools in the drillhole to pinpoint the location of the bottom of the hole at any time, thus preventing a dispute over whether adjacent property rights are being violated.

Downhole depth surveys also ensure that the oil or gas well has not penetrated a lower zone that is severed from upper zones in a multiple-pay area. Instruments can be used to determine whether an oil or gas zone is being produced from any zone downhole.

Both the potential inaccuracy of measuring devices and the possibility of dishonest measurement of bulk commodities typify the problems confronting a mineral owner seeking a royalty payment. The production of solid bulk minerals such as coal is determined by weighing a truck or railroad car on a large drive-through scale, then loading it and subtracting its “tare” weight to determine the amount of solid material being transported. Liquid commodities such as oil are measured by flow meters or storage tank measurements. Gaseous commodities such as natural gas are measured by rotating meters or orifice plates. All these measurement systems contain inherent inaccuracies such that the systems must be “proved,” or calibrated against a measurement standard at regular intervals.

The measurement of solid or liquid minerals in floating vessels such as barges is made by displacement of the barge in water. This is done by scaling its draft in water in an unloaded and loaded condition. The draft per weight of cargo is then converted into tonnage.

Timber Rights and Water Rights

Other types of property rights may be seen in certain parts of the United States. Examples of these rights are timber ownership and the right to use surface or underground water resources. The ownership of water resources is particularly important in the more arid areas of the Southwest, and legal battles are frequently fought over access to potable and irrigation water.

Timber ownership is frequently bought and sold in the southeast and northwest areas of the United States. In areas where tree harvesting is a recurring endeavor, the right to grow timber is valuable and is often at odds with the extractive industries.

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