Institutions frequently wind up with mineral assets through gifts from donors, often located in multiple states. Mineral interests that produce income can seem like a gold mine, but they can also be a minefield if you don’t have the right expertise to help you manage this extremely specialized asset. Trent A. Baulch leads BOK Financial’s Mineral Management team, which is one of the top four largest mineral managers in the U.S., managing mineral assets for clients throughout the U.S. and Canada. He has some sound tips that every organization with mineral assets should consider.
1. Know what you own. Mineral interests that are donated to an institution may already have producing wells on them. It’s important to understand the nature of the existing mineral lease. For example, you may inherit a working interest, where your institution as the mineral asset owner pays part of the operating costs in exchange for a bigger return. That can put your institution in the position of owning an operating interest in an oil or gas well. Non-business income that’s not related to the institution’s primary purpose can jeopardize an institution’s non-profit status. In that instance, it might be better not to accept the asset or to sell that particular asset. An expert mineral manager can assist you with the “keep or sell” decision, and can help you get the best market price possible if you do decide to sell.
2. Energy producers know the market. Make sure you’re on a level playing field. The increased use of horizontal drilling has changed the oil and gas industry significantly. Horizontal wells tend to produce more, and produce quicker, but production typically declines quicker than on a vertical well. This is just one factor to consider when negotiating a mineral lease. Energy companies know what they have to pay to get a lease – but they’re not going to offer top dollar unless they have to. An expert mineral manager knows the market and can negotiate the best deal possible on your behalf.
3. As the old saying goes, the devil is in the details … and it’s called a lease form. Often oil companies try to convince mineral owners to sign a “standard” lease form. There’s no such thing. Lease forms differ in their provisions and terms. Some contain provisions that can be damaging to your institution. That’s why you need someone to look at each one. This goes back to keeping your institution on a level playing field. A professional mineral manager works with each client to understand their objectives and negotiate on their behalf accordingly.
4. Mineral management requires more than knowledge of the oil and gas industry. Obviously, knowledge of the energy industry is key. But knowledge of trust law, estate and probate laws, contract law and title law – all of which vary from state to state – are equally important. When we manage minerals for an institution, it’s frequently as their agent (vs. a trustee). But because of our history and expertise in the trust business, we understand the responsibilities an institution may have if they are left minerals in a trust. Donated minerals are often done under various names that don’t match up to the legal name of the institution. Yet energy producers insist on dealing with the correctly titled legal entity. Those are the types of issues we can help an institution resolve.