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Mineral Status - The three most common statuses of minerals and how to handle them for mineral appraisals.

January 30, 2018

Properties that are leased and generating income

Properties that are leased and generating income are typically “held by production” meaning that as long as production continues, and the mineral owner is receiving income, the minerals remain under lease with the operator that holds the lease.

 

Mineral leases can last for decades.  There are numerous instances of leases that were signed decades ago and are still in force because production of the minerals continues.  Production may be coming from tired old original vertical wells that are barely producing.  Production may also be coming from newer wells that have been drilled to original formations or to other formations that were bypassed.

 

Mineral leases can also expire.  In some cases, the old original wells that held the lease by production are producing so little after their decline that it no longer makes sense to continue to operate the wells.  When this occurs, it is called the economic limit.  The economic limit is the point at which the wells are no longer generating income in excess of the expenses.  Wells that meet the economic limit may be shut-in or plugged and abandoned.  When this happens and income is no longer being paid to the mineral owner, the lease expires and becomes available for a new lease.

 

Appraising properties that are leased and generating income relies on the income approach.  This approach considers the income that is being generated from the producing wells and any wells that are anticipated to come online in the reasonably near future.

 

Properties that are leased and are not generating income 

Properties that are leased and are not generating income are very common.  Landmen seek properties that are unleased and lease them from the mineral owner betting that eventually the minerals will be developed.  A leased property either gets developed, renewed after the current lease expires, or the lease expires and the minerals are once again available. 

 

A lease is usually signed with a lease bonus.  A lease bonus is paid upon signing the lease and is typically a dollar amount per net mineral acre.  For example, if a section of land is being leased, the gross mineral acreage is 640 acres.  If the mineral interest is 50 percent, the resulting net mineral acreage is 320 acres.  If the lease bonus is $100.00 per acre, the total lease bonus will be $32,000.

 

The primary lease term and sometimes a secondary lease term will govern how long the lease remains valid before development or production holds the lease (holding the lease is described above).  If the lease is not developed in accordance with the terms of the lease by the end of either the primary or secondary terms, the lease expires and the minerals can be leased again.

Appraising properties that are leased and not generating income relies on the income approach assuming that the leases will either be renewed or picked up by another party.  This approach considers the income that is being generated from the lease bonus that is being paid each lease term.  If there is the likelihood of production from wells in the reasonably near future, that must be considered for the income approach as well.

 

 

Properties that are not leased and are not generating income 

Properties that are not leased and are not generating income are difficult to value.  Minerals that have no apparent market demand are basically without value.  Unleased minerals typically rely on comparable transactions for minerals.  This requires a search of mineral deeds in the vicinity of the subject minerals.  If no similar transactions can be found or if there are no transactions whatsoever, any value assigned to the minerals would be arbitrary.  If similar transactions are found, the appraiser would have to adjust the comparable sales based on any number of factors such as acres, distance to nearest production, geologic properties, and market trends.

These materials have been prepared solely for educational purposes to contribute to the understanding of oil and gas appraisal. These materials reflect only general concepts in the industry based on Colorado and may not apply to all circumstances.  It is understood that each case is fact ‐ specific, and that the appropriate solution in any case will vary.   These materials may not be relevant or apply to any particular situation.  While every attempt was made to ensure that these materials are accurate, errors or omissions may be contained therein, for which any liability is disclaimed.