Hick and severance: possibilities abound

Governor John Hickenlooper today recently threatened any municipality in Colorado with legal action, should it have the temerity to try to ban fracking within its corporate limits. His remarks did not resonate from supremacy clauses (state laws are “higher” than local) or any appreciation for local land-use discretion. Rather, the Guv lamented that property owners “paid for” the mineral estates beneath their feet, and so must not lose. He also alluded to severed mineral estates. There lies the meat of the argument.

Only recently employed, directional drilling accompanied by hydraulic fracturing is being used to reach targets that can not be drilled with a vertical well.

Only recently employed, directional drilling accompanied by hydraulic fracturing is being used to reach targets that can not be drilled with a vertical well.

Most severances occur when someone sells a property and retains the mineral rights, or a portion of them. This may be a hedge against benefit from future development. But modern “fracking” was not generally known or acknowledged until 2007 or so, and so I doubt many property sellers anticipated or expected that particular form of beneficiation.

I was a commercial real property appraiser long enough to learn that the “bundle of rights” within a property depends on reasonable expectations, plus knowledge of what is feasible. If someone in Colorado retains rights to mining diamonds, he is pretty likely to be wasting his time. But when a property is purchased without a severance, is the buyer cognizant of what is to be deeded? If so, what is paid for it?

The answer is very little. Only a buyer of a mineral estate in an area where a certain kind of mineral production is not only likely but also being prosecuted, would pay what might be recognized as “market value” for that estate. The increment attributable to all or part of POSSIBLE minerals within a purchase of the fee-simple interest, encompassing minerals, surface, and everything else, is generally minimal. Oil and gas operators almost always lease; they have no interest in ownership. In these days of CERCLA that may not surprise. At least there were such days prior to Dick Cheney’s tenure in Washington’s Executive Office Building.

Monopoly moneySo, guvna, are you going to bat for the owner of the severed mineral estate, or the owner of a complete fee-simple property? Mineral values are speculative until proven by production; drilling may or not prove them. A former oil geologist ought to know that. You also should know that the market value of a speculative probability is lower than the value of what can be seen, touched, and enjoyed (commonly known as the surface of the planet). It is a real shame you have no interest in protecting that.

Fortunately, owners of the latter are usually citizens of the state and can vote. Owners of severed mineral estates may not live here. If you’ve got nothing better to do than sue cities, then I suggest you go back to drilling. In Zimbabwe.

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