November 2009 "A Quick Overview Of Mineral Law- Part 1"

PLANNING FOR WEALTH AND SECURITY
By Attorneys Jennifer and Jeff Hawkins

A Quick Overview Of Mineral Law- Part 1

Southern Indiana counties have experienced a new surge in oil, gas and mineral development in recent years; most land owners know very little of the law and economic environment in which mineral development companies operate. Those legal and economic factors are far too complex to describe in full detail in this column, but some basic information may be helpful to land owners if a development company representative knocks on you door.

COAL

Coal is a mineral that lies below the surface of the ground among various rock formations. Several different kinds of coal exist in Southern Indiana ranging from coals that are somewhat “clean” or containing low amounts of sulfur, to coal that contains much larger amounts of sulfur. Environmental regulations make clean coal more desirable for coal-burning electric power plants. High-sulfur coal is much more plentiful in Indiana. Sometimes several different kinds of coal may be layered on top of each other and they are identified by numbers that the coal companies used to distinguish one seam of coal from another.

Coal that is close to the surface is easiest to mine with strip mining technology. A strip mine will dig a hole through the surface of the ground and dig out the coal. After the strip mine has removed the coal, state and federal law requires the coal company to restore the surface of the ground to a similar condition to the ground condition that existed before the mine began its operations on that site.

Deeper coal is more often mined by deep mine technologies that require mines to dig tunnels under the ground. The deeper the coal, the more expensive the extraction process may be. Sometimes, thick seams of coal may exist deep under the surface but the presence of water near rivers or underground streams makes it impossible or too expensive to extract the coal safely.

Many people in Southern Indiana do not own the minerals under their ground because a previous owner of the ground sold the coal and other minerals many decades earlier. If a coal company wishes to develop coal on your ground and you do not own the minerals, the coal companies rights to develop the coal depend upon how the coal company acquired its mineral rights. Some old deeds to coal companies gave the coal companies rights to dig buildings and railroads and other structures and stockpile minerals on the surface of the ground. If the coal company acquired those kinds of rights, it is possible that you will have a difficult time dealing with the coal company. Otherwise, the coal company will often pay the surface owner a fee to either lease the surface so that the coal company can develop its coal rights or it will buy the surface from the land owner.

If you own minerals, the coal company may be interested in either purchasing the minerals from you for a fixed dollar value or leasing the minerals from you. An out right sale of the coal is a rather simple idea and the key to determining the value of the coal is to determine the fair market value of the coal. Usually, the coal company knows what the coal is worth if the coal company can sell it and it will usually offer a much smaller value to the land owner than the coal company can sell the coal than the price the coal company would receive for mining and selling the coal to a power company because the coal company intends to make a profit on its development of the coal.

A coal lease is an agreement in which the coal company agrees to pay some money at the beginning of the lease, called “advance royalty” for the right to establish the lease. When the coal company removes the coal from the ground, it will pay a royalty to the mineral owner at a rate of several dollars per ton of coal. The lease will entitle the coal company to claim a credit for the advance royalty that it paid and will only begin to pay earned royalty to the mineral owner after it has claimed full credit for the amount of advance royalty that was paid at the beginning of the lease.

A mineral owner will often be paid more money on a coal lease than it will be paid for selling the coal. The problem, however, is that the coal company can shut down the coal production if the economy changes and the price of the value of coal drops. Therefore, some coal leases lapse and mineral owners end up owning undeveloped coal that they can’t sell to anyone else. Ultimately, some risk accompanies the decision whether to sell or lease coal.

Next month, this column will focus on oil and gas leases.