Mineral rights & fracking
People are typically convinced that their property rights encompass everything – land, water, sky, minerals, all that lies above and beneath the ground. In some states where there are few or no valuable resource deposits, this is actually true. When the property is transferred, all corresponding rights are also transferred, making for an uncomplicated property rights system. This is called a “unified estate” or “fee simple”.
Ownership rights in mineral-rich states, however, differ substantially. Rights are usually split or “severed” into surface estate rights and mineral estate rights, but surface rights are subservient to mineral rights. Some states with “split estate” systems include: Texas, Oklahoma, New Mexico, Pennsylvania, Colorado, Louisiana, and New Mexico. Hence, rights to one property parcel can be owned by two separate parties; the party who controls the mineral rights can develop and extract any subsurface resources at will. Conversely, “fractional ownership” refers to a situation where the surface owner does own about half of the mineral rights beneath their property, probably splitting that tenure with other family members, a company, or a government entity. In “severed ownership”, the homeowner has no mineral rights. Because the federal government owns and manages various oil and gas resources beneath non-federal surface property, the new BLM regulations governing fracking may actually apply to many landowners, whose homes sit atop natural gas reserves technically owned by the government. In fact, the federal government owns the rights to approximately 31% of all subsurface mineral resources in the U.S. However, considerable chunks of federal land are leased out to the oil and gas industry, which amounts to accrued fees, lease payments, and royalties that the government and taxpayers receive annually.
Split estates with federal ownership of the mineral rights account for 57.2 million acres of land in the U.S, altogether about the size of Georgia. Moreover, 90% of these federal government-homeowner split estates are found in the West and contained within 8 states: Montana, Wyoming, New Mexico, Colorado, Arizona, California, North Dakota, and Idaho. To what extent the federal government will lease or develop the reserves on these split estates is questionable; most of our natural gas production is derived from private lands.
Mineral rights: the big picture
Central governments the world over usually own most or all of the mineral rights in the country – that is, the right to extract minerals from beneath the land to generate revenue and to use for energy, transport, military, or infrastructural purposes.
Congress recognized, and the U.S Supreme Court has held, that valuable mineral resources must remain accessible to the mineral developer to allow the United States to control this federal resource which is vital to the nation’s economy and security. (Rebecca Watson, Hogan & Hartson LLP)
The United States is actually very unique in having allowed citizens to own both the surface rights and mineral rights. During the Homestead Acts of the 1800s, homesteaders were not granted explicit rights to minerals, though some citizens were able to reserve mineral rights as federal lawmakers began differentiating between surface and subsurface uses. Congress officially separated mineral rights from surface rights in 1909, in the Weeks Act of 1911, and later re-claimed strategic mineral estate rights for the federal government under the Stockraising Homestead Act of 1916. Land is still nationalized (or owned by the government) in many oil or gas-rich countries. Particularly in the developing world, accounts of corruption stem from state authorities who blatantly extract valuable mineral resources and use the revenue to personally enrich members or networks associated with the ruling party. Scholars have called this the “resource curse”. Often, governments and state-owned companies extract and export resources at the expense of or with little involvement from the majority of the population. In the United States, this situation is prevented in part by a system of private property rights, installed first in the homesteading laws and successfully encouraging development in the West.
Split estates and mineral rights
Homesteaders across the country with either little interest in the minerals under their properties or in an attempt to earn money sold their mineral rights (the ones that had them) to private interests over the past century. Because railroad land grants were split and the surface rights were sold to individuals, many of the mineral rights on those tracts of land are now owned by corporations. Furthermore, mineral rights across some states grew even more complicated with split estates: one party could own the right to develop coal and another party could own the right to develop the oil and gas under the same piece of property. In 1998 the federal government ruled that in the case of coalbed methane (involving coal and gas deposits and separate owners of each), the owner of the natural gas deposits would prevail and given privileged access. Though consultation is recommended first, surface owners cannot prevent the development and extraction of resources beneath their properties. Landowner protection legislation followed in Western states where conflicts between owners erupted and objectors desired a channel for addressing grievances and negotiating an agreement between separate owners. Generally, even if no agreement is successfully secured, the mineral owner can post a bond to the state and begin operations anyways. Critics have suggested that this property rights regime is not as efficient, sustainable, or fair to all parties involved.
“All parties with surface rights within the designated radius of the development (should) have the same kind of transferable veto over development held by the actual development property…Before development, the develepor would be obligated to negotiate an agreement with all owners within some development radius. (Curtis Eaton, Allan Ingelson & Rainer Knopff from the Natural Resources Journal)
How much mineral estate does government own?
It is estimated that local, state, and federal governments control about 1/3 of all mineral rights in the United States. For federal land and non-federal land, the Bureau of Land Management is charged with overseeing land use practices – in fact, the BLM has one of the only publicly available databases on the United States’ mineral rights profile. Their records reveal that the oil and gas industry leased 41.5 million acres of land in 2003 while the latest figures show an increase in private oil & gas ownership: 45.4 million acres for exploration and drilling. Accurate figures on mineral rights ownership across the U.S are hard to come by; trading of rights and leases happens at such a fast pace as to render data obsolete after a year or two. For example, it’s difficult to ascertain what percentage of American homeowners actually own their property rights – current estimates lie between 15-25%. Because property ownership and titles A) differ between states and B) can be severed or split between multiple owners who are often not even in contact with one another, it is difficult to know how many mineral rights are still owned privately. How much land has changed hands since the shale gas boom? Actually, in most cases, oil and gas rights (included in mineral rights) are leased not sold.
Lease flipping and fracking
With newfound reserves comes financial speculation from investment firms interested in the revenue stream from natural gas production. Thus, many homeowners in the eastern states have been consulted by investment firms, oil and gas companies, or venture partnerships interested in leasing the mineral rights from homeowners in order to get a cut from royalties generated by new fracking wells. This is especially common in counties located on the Marcellus and Uticus shale reserves. Owners listed on the mineral rights deeds are changing hands quickly – some landowners receive a large payment but lose a potential stream of money from royalties generated later. We should expect the character of mineral rights ownership and mineral rights leasing to change substantially over the next few years, as more organizations and companies yearn to earn big from successful natural gas extraction technologies and fracking projects.