The situation: You’re in negotiations to buy your dream ranch and have come to an agreement with the Seller on the purchase price, but the Seller informs you that she would like to reserve the minerals rights. She says there is an old pumpjack on the back of the property, and the well is producing a few barrels of oil a month that she would like to continue receiving royalty checks for. A friend in the energy industry advises you to bargain for at least a portion of the mineral rights. What should you do?
First and foremost, you should enlist the help of a reputable petroleum landman to determine the Seller’s mineral rights. Mineral title in Texas can be very complex, and as a result, the Seller may be confused as to what interest, if any, she has in the minerals under the ranch.
The landman can search the county property records and prepare a mineral ownership report, and if you would like to be thorough, you could have an oil and gas attorney prepare a title opinion based upon the landman’s research.
It’s worth noting that contemporary title policies do not cover mineral title, so the best form of insurance you can obtain would be the attorney’s title opinion.
The landman should also be able to help you determine the value of the minerals under the ranch based on factors such as the production history of the tract, local leasing trends, and the purchase price paid for minerals in the area on a net mineral acre basis (similar to per square foot comparables in real estate).
Once you have an understanding of the value of the minerals and the amount of mineral interest owned by Seller, you are ready to negotiate and have a variety of options open to you, including:
1. Negotiating for a fraction of the minerals, such as a 1/2 interest.
2. Allowing the Seller to reserve a royalty interest in the existing well only.
3. Negotiating for the mineral rights below a certain depth, allowing Seller the benefits of her old, presumably shallow, existing well, and allowing yourself to cash in on a potential deeper, non-conventional formation, such as the Eagle Ford and other shale formations that have revolutionized the oil and gas industry.
You would be well-served in seeking the assistance of a landman during your negotiations, and at any rate, you should ensure that an oil and gas attorney reviews the deed to ensure it accomplishes your goals.
In the event you agree to allow Seller to reserve all of the mineral rights under the tract, beware: Texas law provides that the mineral estate is dominant to the surface estate, meaning the Seller, or any oil company she leases to, will have broad rights to use the surface of the ranch.
Our next blog post will elaborate on the ramifications of owning the ranch subject to the Seller reserving all of the mineral rights. Stay tuned for next month.
Written by Patton VanVeckhoven