What’s Involved In Managing Mineral Properties?

In the oil & gas industry, mineral property management companies are often hired to manage large mineral property portfolios. Property management companies are often paid a fixed percentage of royalty revenue as a management fee, which compensates the property manager for their effort & expenses in managing the properties.

In this article, we’ll explain the management responsibilities of these mineral property management companies.  Let’s jump in!

Negotiation & Execution of New Oil & Gas Leases

A cornerstone of mineral property management is the securing of new oil & gas leases on unleased portfolio acreage.  A good mineral property management company will not only negotiate and execute these leases in a favorable manner for their client, but they will also actively market unleased acreage to exploration & production (E&P) companies which may be interested to lease the acreage.

So what exactly is an oil & gas “lease”?

Before an oil & gas E&P company can drill wells on any acreage, they must first secure permission from the mineral interest owner(s) to do so.  This “permission” comes in the form of an oil & gas lease.

The process typically begins with the E&P company selecting a tract of land where they believe there is potential for drilling a lucrative well.

After an area has been chosen, public records are checked to determine what portions of the acreage are leased or open as well as who the record owners are of the mineral interests in question.

Once the open acreage & ownership has been determined, the E&P company will present an offer to the mineral owners to lease their mineral interests for a set period of time (typically, 2 to 5 years) at a specified price per acre. This payment is called the “lease bonus” and is payable regardless of whether the E&P company actually drills any wells during the lease term. The lease will also specify a royalty percentage (typically between 12.5% and 25%), which is the percentage of net proceeds from the sale of produced oil, gas, or other hydrocarbons to which the mineral owner will be entitled, should one or more wells be drilled during the lease term. Once the offer to lease is accepted, the mineral owner is sent a lease form and an order for payment.

It is important to understand that the mineral owner(s) receive the payments mentioned above since they own the mineral interests being developed, but they are not responsible for any of the costs of drilling or operating the wells – this expense (and risk) falls firmly on the E&P company.

Review & Validation of Division & Transfer Orders Related to New & Existing Wells

Mineral property managers also manage the division and transfer order processes for all of their clients’ new and existing wells.

Division orders are contracts between the well operators (E&P companies) and mineral owners which are executed immediately after a well is drilled and set to begin producing. To receive royalty payments, mineral owners must execute the associated Division Order for the well(s) which have been drilled.  The Division Order states clearly the final percentage of revenue from the wells which will be due & payable to the mineral owner and is executed for avoidance of doubt and to diffuse objections down the road.

It is critical that a mineral property management company review these division orders very carefully to ensure the accuracy of essential information like the effective date of production, the payor’s name and address, the well name and legal description, tax identification numbers, and, most importantly, the decimal interest (percentage) which the mineral owner will be paid on.

Another document which is occasionally relevant to mineral property managers is transfer orders – these documents are sent by operators when a particular property’s ownership changes. If a property with an already-existing well or wells (for which the mineral owner(s) are actively receiving royalty payments) is transferred from one mineral owner to another due to purchase, inheritance, or any other reason, transfer orders are issued to one or both parties to acknowledge the transfer and ensure that all parties agree to the change.

Verification of Payments from Operators & Purchasers

A good mineral property manager will review all lease bonus, royalty, and other payments received to ensure that they are accurate and in compliance with the executed lease terms.

In a more basic sense, they will also ensure that all payments to which their clients are entitled are actually received, as checks can very easily get “lost in the mail” when dealing with large mineral property portfolios. It is not uncommon for a single portfolio to receive several hundred or thousands of revenue checks per month, being issued by various parties. In managing a portfolio of this scale, simply ensuring all payments are received is critical.

Lastly, on an ongoing basis, a good property manager will ensure that payment is being received on all wells that cross portfolio acreage using specialized software to map the locations of all existing wells against owned acreage to ensure that division orders and ongoing royalty payments are being received from all overlapping wells. If wells are discovered to exist which the client is found to *not* be in-pay on, a good property manager will reach out to the operator of the well in question and ensure ownership information is corrected in their systems and payments are issued as required.

Verification & Payment of Property Taxes

When managing large mineral property portfolios, one of the most critical management responsibilities is the assurance that all due property taxes are paid on all owned acreage.

In most states, at the time of acquiring a new mineral interest, the new owner must inform the tax authority that the ownership of the property has transferred and provide their contact information. After that, each year, the tax authority will appraise the property in question and property tax statements will be sent by the tax authority to the owner in question, which must be verified against owned acreage and paid promptly to avoid penalty & interest charges – or contested if the appraised value is unreasonable or inaccurate.

When managing a large mineral property portfolio, among the most critical steps in this process is simply verifying that tax statements have been received and paid on all owned interests.  Why does this matter so much?  Well, if property tax payments aren’t received by the tax authority in question, even if they have the owner’s address incorrect or they are sending the statements to the previous (incorrect) owner, the property will become tax delinquent and can be sold at the courthouse steps to the highest bidder in a Tax Sale!

To avoid this, a good mineral property manager will compare all portfolio properties owned against the tax statements received each year to ensure that property taxes have been paid on 100% of all portfolio properties.

Filing of All Necessary Tax & Regulatory Paperwork

A mineral property management company will generally handle all of the necessary tax and regulatory paperwork, such as the organizing and indexing of annually-received 1099s related to royalty income received, cost basis on owned properties (relevant in the event of a sale), and all basic entity bookkeeping needed so that state & federal tax returns can be filed accurately by a CPA or other tax professional.

Token Management Services

In the case of Mineral Vault tokenized products, the designated property management company, Mineral Vault LLC, handles all processes related to token holder management and support.  For example, Mineral Vault LLC is responsible for the declaration and payment of noncumulative dividends to token holders, compliant onboarding of new token holders, token issuance, as well as transfer and wallet support requests.  The property manager is responsible for nearly all general token holder support processes & inquiries, as well as inquiries from prospective token holders.

Conclusion

So, there you have it! Managing mineral properties is somewhat complex, but a good mineral property management company can completely handle these responsibilities and turn mineral property ownership into a passive endeavor.  With Mineral Vault tokenized products, Mineral Vault completely handles all of the responsibilities discussed in this blog post on behalf of token holders, leaving them with a completely passive, yield-bearing investment in America’s finest mineral properties.