Mineral Rights: The Basics

Basics of North Dakota Mineral RightsBecause oil was discovered in North Dakota in the early 1950s, oil and gas law in the state is relatively new and continues to evolve. As the courts interpret existing laws and new legislative statutes are enacted, revisions are made to Chapter 38 of North Dakota’s Century Code (Mining and Gas and Oil Production).

“We look to Texas, California and Oklahoma, for example, for guidance, but North Dakota law has a lot of nuances, special rules and holdings and special ways of looking at them for minerals, which would be contrary in other states,” said Charles Neff, oil and gas attorney and senior partner at the Williston-based law firm, Neff, Eiken & Neff.

One aspect of oil and gas law involves the particulars of mineral and surface rights ownership.

Mineral Vs. Surface Rights

The owner of a property’s acreage is the surface owner. That party has the right to occupy, lease and use the property, grant easements for access to and from it and produce the present surface materials, such as coal, clay, scoria, gravel, sand, rock.

Related to that same acreage, or surface estate, may also be a mineral estate, which encompasses the oil, gas and other minerals beneath the surface. The owner of those mineral interests has certain rights depending on the type of ownership they have. Some mineral owners have the right to explore for and produce the subsurface oil, gas and minerals. Others only may have a royalty interest, meaning they have rights to income from developed minerals, but can’t lease or develop the minerals.

All mineral rights owners may sell, lease, gift, place in a trust or include in an estate plan part or all of the mineral estate. They also are entitled to income derived from any minerals extracted from their mineral estate. In North Dakota, mineral rights are transferred in one of three ways: by deed (there are numerous kinds), probate or court action.

Typically, the owner of mineral rights wants to keep them in the hope eventually they can lease the rights to a company that will produce the minerals and the rights holder subsequently will receive royalty payments.

A surface owner may or may not own the mineral rights on the property, as the two can be severed. Usually in the case of a severed estate, one party owns the surface rights and a different single party or multiple parties owns the mineral rights.

“In certain areas of certain counties, there are a lot of severances. Sometimes those get broken up through different kinds of conveyances into hundreds of parties. Those get terribly complicated,” said Amy Mowry, an oil and gas attorney who specializes in title examination with the Holland & Hart law firm.

Do I Own Mineral Rights?

Parties can determine whether or not they own mineral rights on a particular property by checking the chain of title for a specific area, identified by town, range and section, at the recorder’s office in the county in which the land is located. A place to start is the North Dakota Recorders Information Network (www.ndrin.com), which is helpful but not comprehensive, Neff said. Another option is hiring an abstract company to search. The process is the same as that for researching title to a piece of land.

The chain of title indicates who owns what and the type and quantity of minerals owned. It contains legal documents that prove ownership, the most common being deeds but also potentially court judgments, probates of record, tax sales of record and stipulations of interest. It’s important the entire chain of title be checked for a full, clear picture.

“Simply looking at a deed showing minerals were transferred to you or a predecessor does not mean minerals are owned by you nor may it show just how much mineral acreage is owned,” said David Hermanson, oil and gas and real estate attorney in the Williston office of Vogel Law.

Valuing One’s Mineral Rights

The value of mineral rights most often is determined by outside appraisers experienced with buying, selling and/or leasing minerals. Value depends on numerous factors, including location, previous nearby production, expectations of wells drilled in the area, quantity of the mineral already extracted there and more.

Sale of Mineral Rights

Individuals or companies may buy mineral rights as an investment. Some parties may buy them to participate in the production of the minerals. Others buy them to sell to oil and gas or mineral exploration and development companies. Sometimes these explorers and developers will buy the rights themselves rather than lease them because it’s easier and less time consuming to do so, particularly with greatly fractured mineral rights ownership.

“In a hot area of North Dakota, there is not a problem selling minerals,” Neff said.

The process of selling mineral rights is similar to that of selling surface acreage. A purchase agreement and inclusive terms are negotiated between the two parties (experts advise using an attorney), and, ultimately, a deed conveying the minerals to the buyer must be recorded for completion of the transaction. The seller gets a one-time payment for those mineral acres and no longer owns them. (The size of a mineral acre underground is equivalent to that of a surface acre.)

Leasing Mineral Rights

An oil and gas developer may approach the owner of the mineral rights on a certain piece of property, wanting to lease the mineral acres so it can develop the minerals there. If the mineral owner agrees to lease, an agreement outlining the mutually agreed-upon terms and provisions is entered into.

“There are no cookie cutter leases anymore,” Neff said. “There are probably 20 to 30 provisions in any particular lease.”

The duration of a lease is potentially open ended but a primary term typically is outlined. Today, a three-year primary term is common, Hermanson said.

Typically, the developer (lessee) pays the mineral owner (lessor) an upfront signing bonus, an amount per acre (a document for this also usually is drafted). The figure varies by timing of the lease, region of the state in which the minerals are located and other factors. For instance, in one area, a $200-per-acre bonus might be offered while in another, it exceeds $2,000 an acre, Hermanson said.

Generally, the mineral owner wants income from any mineral production (royalties), terms of which also should be negotiated and contained in the lease. No minimum royalty is required when a mineral owner voluntarily leases their mineral rights, and any amount can be negotiated between the involved parties. Royalties range from a fraction to a percentage of the total oil and gas production attributable to the lease. In North Dakota, typical royalty rates have been increasing, Neff said, and now are between 3/16 (18.8 percent) and 20 percent for oil and gas. Earlier, they commonly were 1/8 (12.5 percent). The lease should indicate at least the royalty amount and how it will be paid.

“To understand this, though, one can’t just look at the portions of the lease addressing royalty,” Hermanson said. “This is because other portions of the lease address the pooling of interests with other interests.”

Leases with the government differ from those with a person or business, as they’re subject to state statutes. For example, when an operator leases mineral rights from the state of North Dakota, they’re required by law to pay a minimum royalty. Typically, the bonuses are high, as much as seven times higher than what a private party would receive, but the royalty is lower, Neff said.

Should a mineral owner not want to lease their mineral rights or participate in exploration and development of their minerals, production of those minerals still can take place legally. This is because North Dakota has a public policy of encouraging oil and gas and mineral development. In this instance, the mineral owner would be responsible for a share of production costs, which typically would be subtracted from their portion of production royalties. In addition, they’d pay a penalty for not voluntarily participating. However, they’d be entitled to royalties while costs were being deducted. That royalty amount, though, typically is less than it would be had the mineral owner agreed to lease their rights.

As with a mineral owner, a surface owner can’t stop production on their land if an operator has been green lighted and permitted for that location.

Comments

  1. Question: If land (with mineral rights) is deeded to a family of 6 members, four of which wish to exercise those rights, two do not. Under ND law, does this fall under majority rules or do all six family members need to be in agreement? Thank you for any information you can give.

  2. Does ND have a right of survivor ship on mineral/surface rights? What is the best way for our Mom to convey her 1/7 mineral/surface rights to her six children?

  3. I purchased 80 acres in an IRS auction in North Dakota a little over 6 months ago. There was not enough time to do a title search as in N. Dakota they must be so busy it takes months. The IRS stated the basic, all liens forgiven and all mineral rights go with the property. Found out months later that there is current leases on the property and it appears that an oil well is also on it. What can we do or what rights do we have other than the land itself.

    • Marcellene Tuffli says:

      I have 49 acres in Benson County which we rent out to a local farmer. I am trying to find out what the value of this land is and if I were to sell it can I keep the mineral rights. Marcellene Tuffli 503 645 1845 mandat@comcast.net

  4. liberalinlove says:

    Mineral rights were in probate over my grandmother’s estate, when my mom passed away. Now we need an addition $2,000. for mom’s probate. Why does my dad not inherit according to state laws.

  5. Ralph Byquist says:

    My Mom grew up as a teenager in Montrail county ND on a homestead established in 1917, does she or her children have anyrights to mineral oil rights.

    • Praying for the Sheeple says:

      You would have to have the title run on the land her family owned to determine if your mother owned any mineral rights.

  6. 3 brothers gifted with mineral deed in ND; 1 dies in testate; does his share pass on to spouse with the rest of his estate, (under New Mexico law)? SHK

  7. Jacki black says:

    If mineral rights ownership are not registered with the county, does the registered owners get their share by default, or can they go on perpituty

  8. I would like to buy my sisters 50 percent interest in some mineral rights that were inherited from our parents through a trust they set up (I already own the other 0 percent interest). How do I determine value and what is the best way to title the rights so that they would be passed to my daughter upon my death?

  9. mark

Trackbacks

  1. […] North Dakota’s mineral rights laws are relatively young compared to other states. The laws contain many nuances, according to a Williston-based law firm, and as the courts interpret the laws, revisions are being made to North Dakota’s Century Code on “Mining and Gas and Oil Production.” Read the story at North Dakota Business Magazine. […]

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