Oil and Gas Lease Negotiations – Considering Valuation Variables!
June 27, 2016
One of the more in-depth considerations when selling mineral royalties on a piece of property is how the valuation of the minerals is determined. Landowners looking to sell gas and oil royalties are compensated by companies that purchase their mineral rights for a contracted period of time; the amount paid often varies a great deal. Valuation of mineral royalties is dependent upon many factors that a landowner should understand before leasing their oil and gas rights.
Location Matters in Various Ways
Not all oil or gas producing land is the same; because of this, the value of the minerals extracted from the land will also differ. Based on the geology of the land, how much resource is stored within it, and the difficulty of the effort to extract those hydrocarbons, value can vary. Ground that is easier to work in and can produce greater volumes often means a higher valuation of gas and oil royalties and vice-versa. When the cost of extracting minerals will be higher due to geological differences in the ground, valuation may be lower. In addition, minerals sourced in geographical areas where there is less demand may be valued less than in other areas.
Size of Mineral Deposit And Its Value
Similarly, the larger the size of any oil or gas deposit, the higher its value due to reduced extraction costs. The main expense when extracting minerals from the ground is the actual drilling; so the more volume that is extracted, the lower the extraction will cost. Therefore, energy companies are usually willing to pay more for oil and gas royalties when they know there is more volume to extract for their drilling investment. The value of the lease is worth more because of reduced extraction costs, plus more volume means greater overall value throughout the production lifetime of a piece of land.
Producing Versus Non-Producing Mineral Rights
Producing mineral rights are those that are actively being drilled and are producing oil or gas. Non-producing mineral rights are those that are not actively producing oil or gas, either because the land is being explored to tap into resources, the company leasing the rights is not yet exploring the land, or any other reason why there would be no production. Land that is actively producing oil and gas is naturally going to have a higher value as the resources are collected. The higher the production rate, the more a mineral royalty is worth. Yet it is important to recognize that production rate usually declines over time and with it, the amount of income generated through the sale of royalties.
Demand for Resources
As with any other product, supply and demand also affects the value of mineral rights. Oil and gas royalties will fluctuate based on the current market price of these products, how strong the demand is, as well as how much supply is available, both in the ground and already drilled.
Based on the variants referenced above, owners interested in selling their gas and oil royalties should make sure they have an understanding of how mineral rights are valued and the exact makeup of any offers that have been made by those interested in buying the mineral rights. When selling royalties, mineral rights owners can do their research and negotiate with buyers to obtain the fairest price. Above all, when selling mineral rights, always work with a royalties company that will make sure you are getting the best royalties from the sale!
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