A lot of landowners have questions regarding the expiration of mineral rights. This article aims to clarify some of the issues that tend to cause the most confusion.
Mineral Rights Are Just One of Many Types of Property Rights
Mineral rights are just one of the many forms of property rights that an individual can own. Other types of property rights include water rights, grazing rights, the right to build structures (development rights), and a whole swath of various types of rights of way. In areas where there is, or has been, a lot of oil and gas development, it is not uncommon that mineral rights have been severed (split) from all other rights. As such, the surface property owner will generally be different from the mineral (or subsurface) property owner.
Reversion of Mineral Estates to Surface Property Owners
In some states, mineral rights revert to the surface owner under certain conditions such as death, failure to produce oil and gas, or the passage of a specified period of time. For example, in Louisiana, the seller of a property can split their estate and sell just their surface rights while retaining their mineral rights. But, if after 10 years the mineral rights are not being exploited (there is no oil and gas exploration or production), then the mineral rights revert to the new surface owner. In North Dakota and Ohio, if the minerals have not been explored or exploited for 20 years, then the surface owner can claim them. However, in some of the major oil and gas producing states, no such laws exist. In Texas, Oklahoma, Colorado and Montana, mineral owners can own the mineral rights indefinitely and there is no way for them to passively revert to the surface owner. If a surface owner wants to own the mineral rights under their land, they must find and contact the mineral owners and offer to purchase them.
Expiration of Oil and Gas Leases
Often people hear about the expiration of mineral rights in association with oil and gas leases. Oil and gas leases are often signed between a mineral owner and a company that intends to produce oil and gas from the property. A lease agreement will typically specify a primary and a secondary term. A primary term is the amount of time a company has to begin attempts at producing oil and gas. This typically requires drilling an oil or gas well. A typical primary term is three years or five years. If a company fails to drill a well within three or five years, then the lease expires, and the mineral owner can lease their mineral rights to a new company. Many mineral owners may go through many years of leasing their mineral rights repeatedly with no one ever actually drilling a well.
The secondary term of a lease generally specifies that once a well has been drilled, then the lease continues to be active as long as that well is producing oil and gas in “paying quantities”. Paying quantities simply means that enough oil and gas is produced to where it financially makes sense to keep the wells open (as opposed to plugging them). The secondary term of an oil and gas lease varies by how long oil and gas wells produce. These can be as short as a couple of years, or as long as several decades. There as some wells in Oklahoma that were drilled in the 1920s and continue producing today. As such, the oil and gas leases associated with these wells are still active. If production of oil and gas ceases or is so low that it is no longer financially reasonable to produce the wells, then a company will typically have a specified amount of time to bring production back up. This is usually just a few months. If production does not come back up, then the lease expires, and the mineral owners is free to lease their mineral rights to a new company. There are many mineral owners that should keep a close eye to the expiration of their oil and gas leases. Sometimes companies will continue to produce just a few barrels of oil a day to maintain their lease, and a legal case can be made that these wells are no longer producing in paying quantities and that the lease has been terminated, freeing mineral owners from their lease agreement.
For more information on the value of mineral rights and oil and gas leases, feel free to contact Petroleum Evaluation Group.