If you own property in specific areas, oil companies could approach you about buying or leasing your land for drilling and extraction. How can you get the best offer from them?
Evaluating property rights offers appropriately
Considering opportunity costs when evaluating two choices can be beneficial. You can calculate by subtracting the expected return of your chosen option from the expected return of other options you did not select.
For example, an oil company might have offered you a deal that would give you $100 million for selling your rights instead of leasing it. Meanwhile, another company asked to lease your rights for ten years for $10 million annually. At a glance, they seem identical. Logically, $10 million in ten years gets you the same $100 million offered by the company wanting to buy the rights outright. If you deduct $100 million from $100 million, it results in zero opportunity costs, so you lose nothing in either scenario.
That seems to be the case until you think about what you could have done with that money instead. Based on this example, $100 million invested in the S&P 500 returns an annual average of 9.7% versus the 10-year expected average inflation rate of 2.36% that your $10 million is losing yearly.
What does this all mean?
It means weighing your choices can be more complex than it seems. Aside from comparing what you could have done with the money you forgo, it would be best to consider the risks of changes over time. Assuming a lease offer is equal to a purchase offer can become risky, considering how the price of the extracted mineral can drop at any moment. The lease offer should consider unpredictable factors, potentially making its pricing higher than the purchase offer.
Having someone to guide you
It is not shameful to admit that we need professional guidance in complex topics. Having someone to advocate for us and look out for our best interests is vital in protecting our rights and investments. This is especially true since selling or leasing mineral rights may lead to complex legal issues and consequences.