What Are Mineral Interests?

What are mineral interests, how are they monetized, and what are the legal frameworks that govern them? If you receive royalty payments from oil & gas production on property you own, it’s critical to know the answers to these questions – though the answers can be hard to come by! This blog post will address many of the “basics”:

What Are Mineral Interests?

Mineral interests are also known as “mineral rights”, and they represent a unique and valuable category of real estate ownership in the United States. Unlike most countries of the world, where the government retains ownership of all subsurface minerals, the United States allows private individuals and entities to possess these rights. 

Owning mineral interests in a parcel of land gives the holder the right to extract and profit from natural resources existing beneath the surface. These resources can include coal, lithium, gold, and silver, but in the United States, the most economically significant minerals are oil, natural gas, and related hydrocarbons.

A notable feature of mineral rights is that they can be (and often are) separated, or “severed”, from surface rights. This means the individual or entity owning the land’s surface may not necessarily own the mineral resources below. Two primary ownership classifications define the structure of mineral estates:

• Fee Simple Estate: Both surface and mineral rights are owned by the same party.
• Severed Estate: Mineral rights have been legally separated from surface rights, with different owners for each. Typically, this severance occurs below a certain depth, often around 100 meters. In regions with significant oil and gas production, the majority of parcels are severed estates.

How Are Mineral Interests Monetized?

Mineral interests transition through various stages before reaching their full monetization potential. Initially, they are classified as “non-producing” until valuable deposits are identified and extraction operations commence. Non-producing mineral interests are generally exempt from property taxes due to the uncertainty of the resources’ value (if any).

Here’s the lifecycle mineral interests typically follow in the oil and gas industry to ultimately generate revenue:

1. Likely Deposits Located:  Exploration and production (E&P) companies, often referred to as “operators,” search for valuable oil, gas, or other hydrocarbon deposits. This process involves advanced geological techniques and technologies which have radically improved over the last 150 years, but even now, the presence and amount of deposits isn’t known for certain until drilling operations are completed. These E&P companies are said to operate in the “upstream” sector of the oil and gas industry because they focus on resource extraction.
2. Mineral Interests Leased:  Once deposits are identified, the operator negotiates with the mineral rights owner(s) to lease their interests. This involves the mineral owner(s) signing an oil and gas lease (OGL) that grants the operator extraction rights in exchange for a lease bonus, a royalty percentage of any production revenue (typically 12.5% to 25%), lease duration, and various other agreed-upon terms. If no wells are drilled during the lease term—usually 3-5 years—the mineral interests revert to being unleased and the mineral owner(s) will have the ability to lease again, to a different operator.
3. Drilling & Production:  After obtaining the necessary permits, operators drill wells to extract hydrocarbons. Operators cover 100% of the drilling and production costs, ensuring no financial burden on the mineral owner(s). The extracted resources are then sold to “midstream” companies, which handle transportation and refining. Refined products like gasoline and diesel are eventually sold to “downstream” companies or directly to consumers. In some cases, large operators manage their own midstream and downstream operations, streamlining the process. Once a mineral interest becomes “producing,” it is subject to annual property taxes based on its appraised value.

Mineral Interests Legal Framework

In the United States, mineral rights ownership is shaped by a combination of federal and state laws. Federal legislation, such as the Mineral Leasing Act and the Mining Law of 1872, establishes broad guidelines, while state laws provide detailed regulations that vary significantly across regions. States like Texas, Oklahoma, and North Dakota have specific rules tailored to their abundant mineral resources.

Like other forms of real estate, mineral rights can be leased, sold, or inherited. These transactions must comply with both federal and state laws, which include numerous administrative and title requirements. The complexity of transferring mineral rights often leads to title disputes and other challenges.

Conclusion

Mineral interests are a vital component of the United States energy sector and real estate market. Understanding property types, the monetization process, and the regulatory framework is essential for all stakeholders. For additional important reading, take a look at our companion blog Types Of Mineral & Royalty Interests for additional information on the various financial interest types which exist today in addition to the basic “Mineral Interest” discussed above.