What's the Difference Between Mineral Rights and Royalty Rights?
These terms are becoming more prevalent in our day and age and starting to gain a lot more attention, especially by venture capitalists and institutional, private, and passive investors looking for a safe place to invest with a minimal amount of risk.
These terms are often used in a confusing way and the definitions tend to overlap on occasion and definitely require clarification.
I feel it prudent and most logical to start from the top, or surface, and venturing downward and out, so get ready and buckle your seatbelts!
But before we go, first a bit of intel that applies as we dig into all these various kinds of interests, conveyances, reservations, etc…
Mineral Right Ownership
A conveyance is simply the legal process of transferring certain property or interests from one person to another, or Grantor to Grantee.
During the conveyance of the property, oftentimes the person transferring the property, the Grantor, will reserve certain rights attached to the property being conveyed.
As to why someone or the Grantor, would do this, could matter greatly for a number of reasons; however, the top two in my opinion would be:
With ownership comes with responsibility:
The recipient, or Grantee, to whom you, the Grantor, intend to deed specific property or interest to may not be as competent as you may be when it comes to matters of oil and gas exploration. There should be thoughtful and careful consideration of what can and/or will take place should there ever be exploration in your area and specifically, on your acreage.
Oil and gas leases can range anywhere from two to three pages up to 20-25 depending the attorney writing the lease. There are lots of things to consider and one better understand the ins and outs.
If you don’t know what to look for it could literally cost you millions in lost revenue.
(By the way, if you noticed yourself pause after reading #1 because you want to grant/convey minerals or because you don’t know what to do after being approached to lease your minerals, you need to find a tenured and knowledgeable person who is educated in these matters. We have created a special blog educating you on the oil and gas professionals who can help and which one might be best suited for you.)
You still want to retain some control:
You, the Grantor, may wish to reserve certain rights, specifically the Executive Rights, should you wish to remain on the property.
The Executive Right is the right to grant or execute an oil and gas lease covering the mineral estate.
As the surface owner, you will certainly want to be the one deciding what takes place as far as operations are concerned on your property. If one raises any kind of livestock, wild game for hunting, or does a lot of farming, surface use can be a very big deal and you will want to retain your Executive Rights.
Intentions and/or specific reservations need to be very clearly spelled out during the transfer of specific property or interest. If certain rights need to be withheld from a Grantee for any reason, then during the transfer of specific property or interest is the time to do it.
"It is very important to know that unless one or more of the various types of interests is not expressly RESERVED during the conveyance, or transfer of certain property or interest, ALL your RIGHT, TITLE, and INTEREST will pass through with the conveyance to the next party."
If you own the surface rights to an area of land it does not necessarily mean you own the minerals below that land.
In areas of the country where drilling or mining occurs, the ownership between the surface of the land and the minerals beneath it are often severed.
As a sole surface rights owner, this means you have no rights to the minerals or the royalty rights attached to the minerals that are extracted from beneath your land. However, depending on the state, there are laws to help protect surface owners and make them feel more comfortable with oil companies drilling on their land.
Nowadays, oil and gas companies tend to play nice with the surface owner and pretty much always put what is called a Surface Use Agreement in place.
I guess they got tired of their employees and contractors getting shot at and having to place temporary restraining orders (TRO’s) against the owners of the surface!
I’m joking around, but also totally serious; ask almost any tenured Landman and they’ll confirm this really does happen and probably have a story of their own.
How the Rights of the Mineral Holder Differ from the Rights of Surface Owner:
In certain states, the mineral estate carries more weight, or has greater rights, than that of the surface estate.
Texas, for example, is considered a “mineral dominant state”. Because of “an imperative rule of mineral law: a mineral owner’s estate would be worthless without the right to reach the minerals” (Moser vs. U.S. Steel Corp., Texas 1984).
The surface estate is subject to the rights of the owner of the mineral estate to use the land to extract certain minerals lying beneath so therefore, the mineral estate carries with it “superior” attributes or rights and that is why it is also referred to as the “dominant estate”.
The owner of the mineral estate must have the right to use the surface estate to be able to “go on the land” and drill wells or mine for certain types of minerals should they be present and be of value. This means the mineral owner may grant an oil and gas lease to an exploration company to drill wells on the land without the surface owner’s consent.
However, the amount of surface that may be used can only be what is minimally required or necessary to extract whatever minerals lie beneath.
IMPORTANT FACT: As the surface owner, whether you’re a mineral owner or not, you cannot keep any other mineral owners from exploring for the natural resources below the surface.
In Texas, an oil and gas lease is a conveyance by the mineral owner, the Lessor, to the oil and gas company, the Lessee, of the mineral estate for a specific time frame, or “term”, and thereby the oil company grants to the mineral owner, or the mineral owner reserves, a particular royalty rate or percentage, from what is produced and sold from the land.
There are several other conditions and clauses outlined in an oil and gas lease that carry weight and that one needs to pay attention to; we get into those in our upcoming blog, "Common Clauses Found in Leases".
The mineral estate, similar to the surface estate, is considered an ownership interest in the minerals below the land surface of a particular section, parcel, or tract of land and containing boundaries.
In Texas, as well as many other states, the mineral estate can be separated (“severed”) from the surface estate and is very commonly done so. This is done during a conveyance or transfer by the Grantor to the Grantee and by way of a reservation specifically mentioned and outlined in the conveyance.