Finding oil on your property can feel like hitting the jackpot — but the laws surrounding mineral rights aren’t quite as simple as cashing in. You should obtain legal counsel to explain your options and protect your interests.
Board-certified real estate attorneys can provide valuable guidance on property rights and contracts and help you make informed decisions throughout this exciting yet complex process.
This guide by the board-certified oil, gas, and mineral rights lawyer Stephen K. Ganske focuses on the legal landscape in Texas; however, the core principles outlined here are generally applicable across the United States.
If You Find Oil on Your Land, Is It Yours?
When you discover oil on your property, you don’t automatically have the right to drill. Before celebrating, you need to confirm that you own the mineral rights, which are distinct from surface rights.
Traditionally, both rights belong to the landowner. However, mineral and surface rights can be severed. The original owner might sell the mineral rights to a separate party while keeping the surface rights. This happens more frequently when an area experiences heavy oil and gas development.
What to Do If You Have Mineral Rights: 3 Options
When you own the mineral rights, you have control of any oil deposits beneath your land. What should you do after you discover oil? Here are three options.
1. Oil and Gas Lease
One option is to explore leasing opportunities with oil and gas companies. An oil and gas lease allows a company to explore and extract oil from your land in exchange for compensation. Here's a simplified breakdown:
- Lease Terms: An oil and gas lease might have a primary term where the company must begin drilling and a secondary term for ongoing oil and gas extraction.
- Compensation: The lease might include a signing bonus and ongoing royalties based on production.
- Negotiation Is Key: The value of your bonus and royalties depends on factors like acreage and production volume.
- Surface Considerations: If you also own the surface, you will want to make sure your existing or planned surface used is protected from interference by an oil and gas company.
Seek legal guidance from an oil and gas law attorney to explore your lease options. Your attorney can negotiate with companies, review potential leases, and assess whether the terms are fair.
2. Selling Your Mineral Rights
Instead of leasing the right to drill, you can sell your mineral rights. This option provides a one-time cash payout rather than ongoing royalties through a lease agreement.
You can choose to sell all of your mineral rights or just a portion. A partial sale allows you to potentially access cash upfront while retaining some future income potential.
The value of your mineral rights depends on several factors, including the estimated oil reserves, production potential, and current market conditions.
Selling your mineral rights is a significant decision. Here are some crucial points to consider:
- Future Income vs. Upfront Cash: Selling offers immediate cash but eliminates the possibility of future royalties from potential oil production.
- Tax Implications: Consult with a tax advisor to understand the potential tax implications of selling your mineral rights.
- Long-Term Impact: Selling relinquishes control over your mineral rights for future development and can affect your options when it’s time to sell your property.
- Surface Considerations: If you also own the surface, unless you negotiate surface considerations at the time of sale, you may not have the opportunity to protect your surface down the road.
If you decide to sell your mineral rights, your oil and gas attorney can work with a professional appraiser to help you determine a fair selling price.
3. Development: The Working Interest Option
Another option is to become directly involved in the development of minerals through a working interest. This approach differs from leasing or selling your rights:
- Active Participation: You participate in the development process alongside an oil and gas company, contributing financially to the drilling and production costs and sharing profits and risks proportionally to your working interest percentage.
- High Risk, High Reward Potential: This option offers the chance for significant profits but carries the risk of financial losses if oil production is lower than anticipated.
- Financial Resources: Participating in a working interest requires a substantial upfront investment.
- Management Obligations: You'll need to be comfortable making decisions throughout the development process.
- Legal Needs: Negotiating a working interest agreement involves intricate legal and financial considerations.
This approach requires significant technical expertise, and partnering with a reputable oil and gas company is crucial for success.
Oil and Gas Regulatory Agencies: Ensuring Compliance
Oil and gas development is subject to oversight by government bodies known as regulatory agencies. These agencies establish and enforce rules related to various aspects of the industry, including exploration, extraction, production, and transportation. Their primary function is to ensure compliance with regulations that address safety, the environment, and operational standards.
In Texas, the Oil and Gas Division of the Railroad Commission of Texas oversees the exploration, production, and transportation of these minerals.
When You Find Oil on Your Property, What Happens Next?
After you discover oil on your property, you have several tasks ahead of you. Along with contacting an oil and gas lawyer, you can start by reaching out to your area's regulatory agency for information on reputable operators, permitting requirements, and environmental regulations.
Here are a few things to expect during the process.
Obtaining Permits
Drilling, operating, and completing wells require permits that ensure safety and environmental compliance. Regulatory agencies review applications, set activity conditions, and grant these permits.
Safeguarding the Environment
State and federal government agencies oversee the environmental impact of oil and gas operations. They may regulate water usage, wastewater disposal, air quality, and habitat protection to reduce this impact. The agencies may conduct regular monitoring and enforcement actions.
Well Performance Tracking
Operators are required to track well performance and submit regular reports to regulatory agencies. Data on production rates, well integrity, and other metrics helps assess well health and ensure operational compliance.
Resource Recovery
Regulations dictate spacing between wells to prevent interference and maximize resource recovery. Pooling allows combining acreage for efficient drainage. These rules balance optimal extraction with environmental and operational considerations.
Industry Standards and Enforcement
Government agencies establish and update oil and gas industry regulations through a rule-making process. Additionally, they develop policies that guide industry practices and align with broader energy and environmental goals. Enforcement of these rules occurs through inspections and penalties.
Data-Driven Decision-Making
Agencies conduct research and analyze data to understand trends, determine resource availability, and inform policy decisions. Through studying geological data, production trends, and potential environmental impacts, the agencies make evidence-based decisions, especially in exploration activities.
Production Monitoring and Quotas
Regulatory agencies monitor and analyze oil and gas production data reported by operators. Some agencies set production quotas to stabilize markets. Frequent monitoring helps the agencies assess overall production rates, identify trends, and ensure adherence to quotas.
Field Inspections for Compliance
Regular inspections ensure that operators comply with regulations. Inspectors visit well sites to assess safety measures, environmental controls, and overall operational practices. These proactive inspections play a crucial role in maintaining adherence to established standards.
What to Do with an Old Oil Well on Your Property: 3 Options
Have you recently purchased a piece of real estate containing an old oil well or discovered one on the property you have owned for years? You shouldn’t ignore the well since it can present a hazard to you and to the environment. Improperly plugged oil wells can leak oil and other chemicals into the ground, and old oil field equipment can be unsightly and dangerous.
A well that has been abandoned by its producer is called an “orphaned well.” The Railroad Commission of Texas defines these wells as those that have received a permit for oil and gas production, but the producer’s license to operate has lapsed and there has been no production report made to the commission in the last 12 months.
Orphaned wells can be researched online on the Railroad Commission of Texas website or by calling the commission field office for your area. If the well is indeed orphaned, consider the following three options.
1. Plug the Well Yourself
The fastest path forward is to plug the well yourself. This can be expensive, but the state of Texas may reimburse you for up to 50% of your out-of-pocet expenses. To plug the well successfully, contact a commission-approved cementer. An oil and gas lawyer can help you through the process.
2. Request That the Well Be Plugged
The Railroad Commission of Texas may plug the well for you. Contact the commission to learn about its state-managed well-plugging program. This option may take some time. It will likely require an on-site visit from state engineers, and you will be assigned to a waiting list.
3. Take Over Production
You may elect to take over the orphaned oil well and produce it yourself. If you choose to do so, you must accept responsibility for complying with federal and state regulations. While this option is not feasible for most property owners, it may be a good choice for someone who has significant experience in the oil and gas business. You may also be able to locate a reputable producer to take over the operations of the well either entirely, or as a joint venture in which you retain a working interest.
