How to Find the Worth of Mineral Rights in Colorado
In Colorado, mineral rights are considered real estate property; there is, however, a distinction between the surface estate and the mineral estate. This separation is called a "split estate", meaning the holder of the surface estate does not necessarily own the minerals lying underground. Entities that hold mineral rights, through ownership or lease, have entitlements tied to those rights. Mineral rights entitle the holder to develop the resource for "reasonable use" and to grant access and drilling via the surface estate. Contracts between buyers and sellers will detail those rights. A lot of information is required to determine the value of mineral rights. Geologists, mineral economists, geographers, and a lawyer will provide information for assessing their worth accurately and writing the contract.
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Instructions
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How to Assess Mineral Rights
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For these purposes, minerals include a broad range of naturally occurring resources, such as metal ore, coal, oil, natural gas, and gems. The first step in assessing the value of mineral rights is to determine the amount of a mineral available. Geophysical studies of the area, using special technology, such as ground penetrating radar and aerial photography, can determine and map the amount of a mineral available below the surface.
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The estimated rate of production is another factor to be determined when valuing mineral rights. How much of the mineral can be brought to the surface, and what is the cost associated with extraction? A large volume of natural gas may lie underneath highly impenetrable rock or be scattered below the surface, requiring numerous well heads or specialized hydraulic fracturing, both of which add onto the cost of extraction. Easily extractable minerals are worth more because the cost of extraction is independent of commodity price fluctuations.
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Mineral rights are also highly dependent upon supply and demand economics. If global supplies are abundant and demand is low, the market price for a mineral will be low, and it may not be worth the cost of extraction. If the mineral right holder decides not to extract a mineral, the mineral right is not worth very much. A mineral right is valuable if there is a lot of the mineral, the market price is high, the extraction cost is low, and the area is easily accessible.
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Colorado mineral rights operate based on the "split estate" principle. The Colorado Oil and Gas Conservation Commission makes rules that govern oil and gas resources to promote public health and welfare while developing the resource. The rules afford access to the mineral rights holder but require minimal damage and intrusion to the surface estate. The rights holder must provide financial restitution to the surface estate for damaged lands, and land must be restored to pre-extraction conditions. The financial assurance is in the form of a bond and adds to the cost of extraction. Costs associated with regulatory compliance, including permitting fees, factor into the value of the mineral right.
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Tips & Warnings
Hire an attorney to write the contract governing mineral rights. The contract should specify the worth of the mineral right in terms of initial payment and royalties. Payment may be specified as a dollar figure per volume extracted. Royalties may specify a percentage of the market value "paid upon extraction."
To determine the true worth before extraction occurs, a mineral rights valuation will require detailed information about mineral volume, extraction costs and commodity prices over time (because these factors will affect extraction time and output), and royalties and payment schedules.
