The impact of oil prices on mineral owners is sometimes difficult to measure. For properties that are currently receiving royalty income, the impact can be seen on each paycheck. However, if your property is currently not receiving royalty income, the impact is much less clear. We will discuss the impact of oil prices on mineral owners with both producing and non producing minerals in this article.
Impact on royalty income
If you are currently receiving royalty revenue from the production of oil, the impact of oil prices will become evident very quickly. A real world example will make this much more clear. Let’s assume your mineral rights produce an average of 180 barrels of oil each month and you receive 1% of the net revenue. In October, the price of oil was $90 per barrel so each month the total sales price for 100% of the oil sold would be $16,200 dollars. If you own 1%, your royalty check would be $162.
(180 * 90) * 1% = $162
However, if the oil price drops to $50 per barrel the next month your check changes:
(180 *50) * 1% = $90
As you can see, for the same production sold you lost $72 dollars in income due to oil price declines alone. The impact of oil prices on mineral owners already receiving royalty income can be seen fairly easily. Where it gets difficult is the valuation of those mineral rights that are not currently producing.
Impact on mineral rights owners
For mineral owners without producing royalties, the value is much less transparent. What is for certain is the price of oil has a very large impact on mineral owners in many different ways.
Drilling – When crude oil prices drop below the cost to drill and produce a new well, operators will do one of two things. They will either stop drilling until crude oil prices rise again or they will move their drilling rigs to “sweet spots”.
Techie alert! For those interested in the finer details, there are three main types drilling locations.
1 – Unproven and Undeveloped – This is often called a “wildcat” project meaning that it is in an area where the operator believes oil and gas may exist but it is removed or on the fringe of any successful projects to date. When oil prices drop, rapid declines in exploratory drilling of this nature will follow.
2 – Proven undeveloped – these are locations expected to be successful from new wells on undrilled acreage considering SOME recent success in the area. It is the middle road where there is enough activity to justify drilling a well despite a lower crude oil cost.
3 – Proven developed – This is the “sweet spot”. These locations have reasonable certainty that a will drilled will produce and provide for a profit. These locations are generally highly active and will command the highest value to mineral owners.
- Leasing Activities – When crude oil prices drop significantly as they have in the past couple of months, leasing often slows or halts completely depending upon how long the lower prices are expected to last. For those properties that are still of interest to operators, the bonus offers and royalty percentages often drop quite significantly to reflect the change in the oil price market.
- Minerals Sales Prices – For those mineral owners looking to sell their rights, it is very likely the price they would have received several months ago will not be there now. The price of crude oil has a significant impact on the future cash flow a buyer would expect to receive. Consequently, the offer prices drop.
The exception to these impacts are if a mineral owner is in an area where only gas is produced. While it is true that oil and gas prices have impacted each other in the past, in recent years this correlation no longer appears to exist. If you are in a gas area, you are safe at least for now.
