Mineral Rights Value
The value of mineral rights can vary widelyCalculating mineral rights value can be a bit like predicting the weather – things can sometimes change awful quickly. When considering the question of how to assess and value mineral rights, many variables must be considered. The value of mineral rights depends on some elements that are reasonably determinable, but become complicated when combined with other elements which seem to fluctuate with the wind. Five dollars an acre, or twenty five thousand dollars an acre? 1/8 royalty, or 1/4 royalty? These are real life (and recent) terms negotiated in oil and gas leases. As with many rules of thumb, one thumb can be a whole lot bigger than another. How to value mineral rights is one of the more popular topics upon which we receive questions. Let’s look a little deeper at calculating the value of mineral rights.
Mineral Rights Value Varies By Location
Would you rather own mineral rights in South Louisiana or Oklahoma – New York or Texas? Or, does it matter? Geology, the study of underground structures provides much of the answer. The fact is that the various characteristics of the underground geology dictate whether or not hydrocarbons may exist and to what extent. The closer you are to known hydrocarbon accumulations, the higher your mineral rights value will be.
Producing Mineral Rights
As you would suspect, minerals which are under production and producing monthly revenue are going to have substantially more value than non producing minerals (A good analogy would be that of a commercial building with a rent paying tenant vs. an empty building). The flow rate at which the oil or gas production is producing is the primary determinant of the mineral rights value, coupled of course with the current oil or gas price. The known presence or likelihood of additional unexplored horizons within an area will also influence value. The presence (or lack) of production is a major influence on how mineral rights are valued.
Non Producing Mineral Rights
Non producing minerals are those that have no current cash flow associated with them. It stands to reason that the value of non producing minerals is less than minerals which are producing cash. In effect, non producing minerals represent (and are valued) as an option on something good to happen in the future (i.e. that oil or gas is discovered and produced). Lack of production will have a major influence on the calculation of the mineral rights value.
Size Usually Increases Value
As with many items, the volume of what you have to offer for sale or lease in the marketplace often influences its value. This certainly applies to the value of mineral rights. From the perspective of an oil company who is leasing mineral rights, the company would rather lease larger tracts than smaller ones. For the same amount of effort, they simply get more bang for their buck. It’s a whole lot cheaper to organize a drilling play when you’re working with a handful of Lessors (mineral owners) with 100 to 1000 acre tracts than with those owning 1 – 10 acre tracts. This same logic applies to the sale of minerals as well.
Oil and Gas Prices
Embedded within any treatment of the question “how to value mineral rights” will be an assumption of oil and gas commodity prices. These fluctuate daily in the marketplace along with all other commodities. U.S. energy commodities are priced continually on the New York Mercantile Exchange (NYMEX).
In summary, the value of mineral rights are dynamic and can shift substantially over time and as a result of underlying influences. As with the old saying all politics are local, the value of all mineral rights is local.
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