Can I keep my mineral rights?
Yes. The general rule of thumb is that minerals run with the land so the mineral ownership and rights to existing royalty payments (if any) pass with the land to the new owner. A landowner must actively reserve or convey the minerals to avoid passing them to a new owner.
This article first discusses the differences between a reservation and a conveyance, then it lists different types of reservations and conveyances, and finally offers some limitations.
Colorado Minerals Include Oil and Gas
Before discussing the different methods for conveying and reserving mineral rights, it is important to define the term “mineral rights.” In Colorado, the term “mineral rights” includes oil and gas, but that is not the case everywhere in the United States. In Pennsylvania, for instance, the term “mineral rights” does not include oil and gas. For the purposes of this article, the terms “mineral rights” and “minerals” include oil and gas.
Reservation vs. Conveyance
An owner can convey her property and reserve the mineral rights in just one deed, known as a reservation, or convey the mineral rights in one deed then convey the remaining surface and improvements in another one. The subsections below explain the difference between a reservation and a conveyance of minerals.
Mineral Reservation Deed
Once a landowner enters a real estate contract with a buyer and reaches closing, the title company will prepare a deed to sign and record in the county recorder’s office. That deed is the legal document that conveys the property rights to the buyer. The language of that deed can except and reserve any right that the owner possesses at the time, including ownership of minerals and the right to explore and produce.
Mineral Deed
Our attorneys often suggest that clients convey their mineral rights to a self-owned limited liability company, even before selling the property to a buyer, to take those rights “off the table” prior to the negotiation. A mineral deed conveys ownership of the minerals underlying the described property, but does not transfer ownership of the surface or its improvements. After executing a mineral deed, the owner may convey the surface and its improvements separate and apart from the mineral rights.
Types of Reservations: Minerals In-Place vs. Pure Royalty vs. Production
Just as there are different ways to retain your mineral rights, there are also different types of rights to reserve. The sub-sections below explore different reservation options available to an owner.
Minerals In-Place
Up to this point, this article has contemplated retention of minerals in-place, which means the owner retains ownership of the minerals and all the rights associated therewith. An owner that retains the minerals in-place has the right to sign an oil and gas lease, permit entrance on the property to develop the minerals, and collect any royalties.
Pure Royalty Reservation
A pure royalty reservation, on the other hand, reserves only the royalty interest contemplated in a specific oil and gas lease (Lease 1). Assume owner O signs Lease 1 with the oil and gas company (OG Co.) covering her property, known as Blueacre. Then, she conveys Blueacre to buyer B and makes a pure royalty reservation of all royalty derived from Lease 1. If OG Co. subsequently includes Blueacre in a production unit[1], O is entitled to all royalty payments under Lease 1 even though she conveyed the property to B.
Consider a similar scenario where O signs Lease 1, makes a pure royalty reservation when she conveys Blueacre to B, but OG Co. does not include Lease 1 in a production unit. If Lease 1 expires, B is free to sign a new oil and gas lease (Lease 2) covering Blueacre and is entitled to all royalties. O’s pure royalty reservation is limited to only those royalty payments that derive from Lease 1. Unlike the minerals in-place reservation, B, and not O, may sign a new lease once O’s royalty reservation is extinguished.
Production Reservation
O can further refine her reservation by specifying production from a specific oil and gas well. If O signs Lease 1 and OG Co. includes Blueacre in the Well 1 production unit, O can make a production reservation of all royalties from Well 1 when she conveys Blueacre. O will continue to collect royalty from Well 1 even after she sells Blueacre. If OG Co. later drills and produces another well (Well 2) pursuant to Lease 1 then B is entitled to all royalties from Well 2 production. Even though OG Co. drilled both wells pursuant to Lease 1, the production reservation stipulates that O will continue to receive royalty payments from Well 1 so long as it produces, and B is entitled to royalty payments from Well 2 and any other wells drilled in the future.
Limitations on Conveyances and Reservation
Once O determines the type of reservation that best suits her interests, she must then decide if and how she wants to limit her reservation or conveyance. Several of such limitations are discussed below.
Fractional Reservation
O is not required to reserve or convey 100%, or 8/8ths in oil and gas lingo, of the minerals. Assuming she owns 8/8ths of the interest, she may reserve any fraction of her mineral rights. O may reserve ¼, and conveys the remaining ¾ to B.
Depth Limitations
O can further limit her reservation or conveyance to specific depths of the subsurface. For example, O may specify that she is reserving ‘only those minerals produced from below 5,000 feet below the surface’ or ‘only those minerals produced above the Topeka Sand Formation.’
Formation Specific
O may also narrow her reservation or conveyance to a specific subsurface formation. For example, if OG Co. drilled a successful well on Blueacre in the Niobrara formation and it expects to drill several more in the future, O could convey Blueacre to B, but except and reserve ‘all oil and gas produced from the Niobrara formation.’ B is free to lease and collect royalty from all subsurface formations except the Niobrara.
What does it all mean…
The simple answer to the question, “I’m selling my home; can I keep my minerals” is yes, but as this article illustrates, there are many intricacies to consider when reserving or conveying mineral rights. While the topics discussed here are the most common, many other types of reservations and limitations exist. The attorneys at Frascona Joiner Goodman and Greenstein, P.C. are experienced in developing plans for landowners who desire to retain their mineral rights and drafting the documents to turn those plans into a reality. Please give us a call or contact me to inquire about your oil and gas transaction.
[1] A production unit is the physical boundary that the oil and gas company draws around an oil and gas well to determine income division amongst owners for that given well.
