Road to maximum gas profits a complicated one

By Misty Brown

LITTLE ROCK — Arkansans living in areas overlying the Fayetteville Shale may see a light at the end of the often-dark financial tunnel.

Property owners in these areas may be anxious to learn if the earth beneath their property has valuable minerals, and, if so, how to go about making a profit from them. But it’s not as easy as selling or buying a vehicle and simply transferring a title, like one would hope. Instead, it’s a process that takes some extensive research to make an informed decision, said Lynn Tranum, owner of Citizens Title and Closing Company of White County.

“It’s very labor intensive to really research a mineral ownership because you have to go back, basically to the late 1800s. It can take weeks sometimes,” Tranum said.

In days before mining and drilling, properties were sold as “fee-simple estates.” In a feesimple estate, the landowner has the rights to the surface of the property, the subsurface where minerals may be located and the air above the property. The owner of a fee-simple estate is said to have both surface rights and mineral rights. However, with the onset of commercial mineral production, such as in the Fayetteville Shale, property transfers have become much more complex.

SURFACE VS. MINERAL RIGHTS

Fee-simple estates can be subdivided through leases, sales, gifts or bequests. This enables multiple people or companies to have partial ownership orrights to different portions of the property. For example, a landowner incapable or uninterested in producing a mineral from his or her property may lease or sell the minerals to a company, yet still retain the surface of the property, including buildings, crops, etc.

Companies or individuals interested in obtaining mineral rights in certain areas often contact property owners in the areas of interest.

“The way it generally works, is companies seek out the [property owners],” said Lawrence Bengal, director of the Arkansas Oil and Gas Commission. “The companies want to acquire the property to acquire the resources.”

If a property owner wants to make sure he owns both the surface and mineral rights, the first step is to contact the county courthouse to research title and deed information on the property in question. “The only official record-keeper is the county courthouse,” Bengal said. “[Researching mineral ownership] may or may not be an easy job, depending on the complexity of their particular record.”

Because of its complexity, property owners may turn to a title company to do the research for them for a fee.

“The best bet is to come to us and let us research it for them,” Tranum said. “We’ve got our records organized in a manner that would make it easier for someone to do a search.”

Regardless of the research method, property owners, once establishing ownership of mineral rights, must decide what kind of negotiation to enter with an interested company.

SELLING VS. LEASING MINERAL RIGHTS

A landowner may choose to sell all mineral rights or lease them to a company or individual. When mineral rights are sold, the surface owner no longer has rights to extract or sell the minerals on the property. The mineral rights are essentially severed from the property owner’s deed and transferred to the buyer.

Leasing mineral rights is an option property owners can also pursue. In this agreement, a company can obtain the right to enter the property and extract the minerals during a given amount of time. Once the lease is ended, the mineral rights are transferred back to the original owner.

During lease negotiations, many companies will offer bonuses to entice property owners.

“The only statutory limit is they have to offer 12 percent or 1/8 royalty, but you can always ask for more,” Bengal said. “The companies, by and large, lease the right for the royalty payment and an up-front bonus.”

LEASE EXTENSIONS

Leases can go beyond theprimary term if a successful well is drilled and production has occurred.

This extension is considered to be “held by production” and the lease will remain intact as long as the royalties are paid to the property owner as outlined in the mineral lease agreement, according to the Arkansas Oil and Gas Commission.

Another factor that can prolong a lease is if a successful gas well is drilled during the primary term of the lease agreement and production has not occurred.

The lease agreement will remain valid if a yearly shut-inroyalty is paid to the property owner.

SURFACE ACCESS AND DAMAGE

In order for a company to access minerals below the surface, it often means it must also have some access to the land above the minerals. According to the commission, the laws of conservation in Arkansas say that mineral rights are dominant over the surface rights. Because of this, the surface owner must allow a reasonable portion of their land to be used for development and production of the minerals unless themineral owner added a “No Surface Operation Clause” to the lease agreement, according to the Oil and Gas Commission.

Additionally, delayed damage to the surface, such as settling or cracks, can occur several years later after a lease has expired.

A fee-simple estate property owner should take this into consideration before drafting a lease with a company or individual. Often, an attorney can help with such negotiations and is the best resource for property owners.

Overall, buying and selling mineral rights is a complex process that is based on the individual property. Property owners must be willing to do the research and negotiate with potential buyers before they can start to see a profit. For more information about individual properties and mineral rights, contact the local county courthouse or visit the Oil and Gas Commission Web site, www.aogc.state.ar.us/.

Three Rivers, Pages 61 on 10/02/2008