Mineral rights ownership is described as a sanctioned right over the extraction privileges to oil, gas, and minerals, such as gold and coal. The ownership is one of the most remunerative assets a person can own today. It provides some exceptional profit potential in the energy sector, especially with oil and gas investments. In the US, the owner of a plot of land who also has ownership of the mineral rights, has the right to extract minerals from their land. Continuing the discussion further, in this post, we take a closer look at mineral rights ownership and the different implications that has in the energy and financial sectors.
What is Mineral Rights Ownership?
In practice, the government partitions land into specially defined areas, commonly called “licenses.” Subsequently, these licenses, or mineral rights, provide ownership to mining and drilling companies on a contractual basis, allowing them to explore and extract natural resources such as oil, gas and minerals from the land.
Mineral rights and leases come under real estate law in the USA. Local courthouses record such leases in the same manner as house title deeds. As the ownership of the land on the surface could be separated from that of the mineral rights. Companies could approach any mineral rights owner and negotiate an agreement.
Obtaining Rights to Extraction
The mining and drilling companies directly contact the mineral right owners (land owners), and negotiate lease terms with them. There are three primary elements to these terms:
- Cash bonus, payable once the mineral lease agreement completes.
- Royalty share from all oil and gas extracted from the property in question.
- The term during the oil company is allowed to drill a productive well
Mineral leases allow oil companies to extract these natural resources while allowing the landowner to maintain ownership over the surface rights. An oil company make take months to target and develop a drilling prospect and commence drilling to extract oil and gas.
Incentives for Landowners
The per acre cash bonus payment could vary from $50 to several thousand dollars, depending on market conditions and the potential to extract oil and gas from the property. The royalty share could also vary 15 to 25 percent, based on the type of negotiation, but the final figure is always influenced by local market conditions. The royalty is paid, in cash, on a monthly basis, before any operating expenses. Royalty interests are the major motivation for landowners, as they offer a potential for substantial earnings.
Incentives for Investors
Direct investments in oil and gas are less vulnerable to economic volatilities than conventional investment options, such as public companies, while the applicable tax incentives provide partial insulation against potential losses. Moreover, there are several drilling costs associated with drilling, such as labor, chemicals, grease, and mud. All such intangible expenses are 100 percent deductible.
Tax Act 1992 exempts Intangible Drilling Costs as a Tax Preference Item. The Tax Preference Items described under the Code greatly affect the way some of these exemptions are taxed, alternatively. The American Tax Code also states that a working interest in an oil and gas well is not a “passive” activity. Therefore, as an accredited investor, you can offset tax deductions against income from active stock trades, salaries and business income.
The Bottom Line
The key element every mineral right owner looks for in the agreement with an oil company is the royalty. The oil company needs to drill a well on your property for you to receive sustained royalty income. On the other hand, if you are an accredited investor, oil and gas represents a long-term investment option promising sizeable returns. No matter which side of the fence you are, it is important to choose an ethical and efficient company that focuses on your specific goals. If you wish to learn more about mineral rights ownership or energy investments, give us a call at (866) 894-7309, or fill out the contact form and we’ll take it from there.