New Oil Wells Shift Farmland Prices

October 31, 2012 05:45 PM
New Oil Wells Shift Farmland Prices

Prairie farmland prices shift with new oil wells

As amber stalks gave way to combines this fall, it was the black gold two miles below that many prairie landowners were thinking about.

An energy boom is stirring up land prices and changing rural communities. Landowners in parts of the Dakotas, Montana and Canada find themselves above the Bakken formation, the largest contiguous oil deposit in the lower 48 states.

Braden Hudye of Norquay, Saskatchewan, shifted from investing in farmland to  commercial/industrial land in the Minot, N.D., area. "Land prices are changing rapidly," he says. Last month, three-quarters of the land 30 miles north of Minot sold for $3,000 per acre—a new high.

It’s easy to see why prices are skyrocketing: contracts for oil drilling range from $55 per acre for a threeyear lease to $10,000 for a 10-year lease. But financial gains vary based on ownership.  Mineral and land rights can be separated; you might not own what is underground even if you own the surface rights. Typically, mineral rights owners negotiate the lease with an oil company, which has a specified time to drill. Once oil is flowing, the owner can receive royalties of 18% to 22% per barrel.

Lease offers around Lon Frahm’s farm in Colby, Kan., started at $20 per acre years ago but have escalated as leasing companies increased and farmers shared information, he says. Many acres were leased for $40 to $65, and some in the low hundreds. With land home to five oil wells that
produce a six-figure income, Frahm gets a royalty fee.

Community Changes. Driving prairie back roads can be exhausting. Oil trucks are hard to pass, and drivers must stop for road maintenance. Each well requires more than 2,000 truck trips, and the heavy rigs destroy roadways, says Alan Dybing of the Upper Great Plains Transportation  Institute, which estimates repairs will require $900 million during the next 20 years.

Ashley Gulke Leavitt, who farms near Mohall, N.D., says the strong corn crop has influenced land prices, but not as much as investment. Land near town is valuable because investors want to build houses and facilities.

As long as oil prices stay above $75 a barrel, companies will keep drilling. For many farmers, the oil boom means more opportunity on top of historical grain profits.

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