Series 2: Types of Mineral Buyers and Who to Avoid
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If you own oil and gas mineral rights and royalties, chances are that you've received contact from someone in the past offering to buy them.
Whether through a flyer, cold call, or potentially even a text message or a voicemail that just appeared on your phone, mineral buyers are everywhere and not all of them have your best interest at heart!
In Series 2, we are taking on the Types of Mineral Buyers and Who to Avoid. We are kicking off the Series with a discussion on the History of Mineral Buying and How to Protect Your Interests. Why talk about the history of mineral buying? Because it provides some excellent context on how to deal with mineral buyers today.
So, in this post, we’ll talk about history of mineral buying, a few important legal concepts that every mineral owner should know, and finally, something that I like to call the Knowledge Arbitrage.
We also have a YouTube video on this topic. You can check it out here:
Part 1: The History of Mineral Buying - Important Legal Concepts and the Market for Minerals in the "Old Days"
Purchases and sales of mineral rights and royalties have been around since the birth of the gas industry. We’ve actually seen recorded mineral deeds and royalty deeds dating back to the 1920s and 1930s—back when the oil and gas industry was a nascent industry. The industry was new, it was growing and new field discoveries were being made all over the country.
This is when legal concepts of ownership of “mineral rights” the first began to be applied to oil and gas. In states like Texas, Louisiana, Wyoming, Colorado and Oklahoma, where oil and gas production began to take off, bodies of law began to be developed to define the rights and obligations of mineral owners, surface owners and oil and gas lessees. Here are a few of those legal concepts:
1. Fee ownership (full ownership) of a piece of property includes with it the right to explore for and produce oil and gas located below the surface of the earth.
2. The “mineral estate” (or rights to the minerals) can be severed (or separated) from the “surface estate” (or rights to the surface) Severance can be made through a deed, through a reservation in a deed, or through a will, and can result in the mineral and surface estates being owned by different people.
3. The mineral estate is dominant to the surface estate for the purposes of exploring for and producing oil and gas. The mineral owner (or its lessee) has the right to use a reasonable amount of the surface in order to exploit those minerals.
So, during this era, while we can see evidence that mineral transactions were taking place, the market was much smaller than it is today. Minerals, for the most part, were illiquid assets.
When we refer to the concept of “liquidity,” what we mean is the ease with which a seller can bring a certain item to market and find a willing buyer. Examples of more liquid assets would be: publicly traded stocks, vehicles, homes, etc.
So, in general, the market for mineral rights was not large—there was not a competitive landscape in which mineral owners could easily bring their minerals to market and find a willing buyer. The asset class was novel and not very well understood.
Who were the Mineral Buyers in the “Old Days”?
Most mineral buyers were individuals, commonly oil and gas professionals (such as landmen or geologists), and in some limited cases the oil and gas companies themselves. For the most part, these individuals who were purchasing mineral rights were not a part of large, sophisticated and well-capitalized organizations. These were individuals doing one deal at a time.
Who were the Mineral Sellers in the “Old Days”?
The mineral sellers were ranchers, farmers and other folks that lived in rural areas where these oil and gas field discoveries were being made. And it’s important to consider the era: the Internet did not exist, cell phones didn’t exist, and folks didn't have access to the amount of information that we have access to today. Because of this lack of information and knowledge, many folks were at a disadvantage when it came to entering into these transactions. In many cases, the mineral buyers had superior knowledge that allowed them to identify a particular piece of land and they used that superior knowledge to their advantage in these transactions.
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Part 2: The Knowledge Arbitrage
This discussion leads us to an important concept that every mineral owner should be aware of: we call it the “Knowledge Arbitrage.”
The Knowledge Arbitrage exists where a buyer has superior knowledge to the seller about the thing being sold.
The knowledge of arbitrage doesn't only apply to sales of oil and gas mineral rights and royalties. We can find examples of knowledge arbitrage in our daily lives.
A great example of a knowledge arbitrage is when you take your car to the auto mechanic! In most cases, an auto mechanic knows significantly more about how your car operates than you do. And, if you're not careful, you could end up paying for a whole bunch of things that don't need to be replaced!
So, the Knowledge Arbitrage is merely the concept that the person who is on the other side of the table from you in a business transaction understands more than you do about the thing that is the subject of the deal.
The Knowledge Arbitrage, as it applies to mineral rights, very much existed in the “Old Days,” but it still exists today! And it leads to a few unfortunate things. Namely, the Knowledge Arbitrage leads to distrust between sellers and buyers. It also leads to the Never Sell Mindset, which we talked about a few weeks ago (link to that post below).
So, how do you protect yourself from the knowledge of arbitrage? There are two primary things you can do:
1. Educate yourself! Just like when you go to the auto mechanic, if you’re not educated about what is broken on your car, then you have to “take the mechanic’s word for it.” Education is absolutely critical.
2. Get a second opinion! And we give second opinions all the time! We have plenty of folks who reach out to use and say “I got an offer from XYZ mineral group. Could you provide me with an evaluation so that I have something to stack this offer up against?”
Understanding the history of mineral buying puts you in a better position to protect your interests today! We hope you'll join us for our next post, where we will talk about the Shale Revolution, the birth of the professional mineral buyer, and the market for oil and gas mineral rights and royalties today.
We hope you enjoyed the post, and please feel free to reach out to us if we can do anything for you!