I have been asked to extend an existing lease

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A scenario:

You granted an oil and gas lease to XYZ Oil Company dated September 30, 2011 for a three year term. The lease is due to expire on September 30, 2014.

In June of 2014, you were contacted by a landman representing XYZ oil company and they wish to extend the existing lease for 3 years (or 18 months, or whatever term) for a modest payment -- perhaps equal to the original bonus given 3 years ago.

Is this a good idea?

The answer, it in a nutshell, is generally, no.

Why?

9 times out of 10, the land situation has changed and you may be able to improve your royalty and bonus. The 'typical' extension is really just a lease amendment that amends the primary term and nothing else.

With my clients whose lease form that I did not negotiate 3 years ago, there is no way that I want that lease extended. I want a new, better, more comprehensive lease for them. I want a lease with more protections and generally a better royalty clause. 99 times out of 100, the lease should be improved upon. A new lease is the way to go.

An extension does nothing generally except to amend the primary term and to ratify the existing lease. A new lease, well, if they agree to that, then they must release the existing lease that expires in September. If not, which lease applies if the lands are put in an unit prior to September 30th? This MUST be addressed and a release of the base lease is the best way, in my opinion.

Have I ever recommended an extension? Sure. Recently. We were on the same iteration of lease form and the oil company needed 5 months because of rig scheduling issues. I gave them a free 6 month extension.

They drilled the well, it was a dry hole but they had a good taste in their mouth with their dealings with me and my client. It is good to grant favors when you can. It is bad to not vigorously represent your client.

Best wishes,

Buddy Cotten
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Thank you Buddy for sharing your expertise! Leasing is a complex body of knowledge for small owners like me, and I am grateful for the identification of issues you captured.

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Hi Buddy,

Thank you for sharing your wealth of knowledge. Could you please explain how pooling can affect the above situation? We are in the exact situation as described above with our lease terminating in June 2015 and have been contacted by a landman to extend the original lease for 3 years. He has told us that we will not pay more than $750/acre and that if we do not take that, they will proceed as planned(not sure what that means) with the forced pooling. There is active drilling and oil production all around us but no active well pulling from our land yet as I understand. Do you have any recommendations on how we should proceed?

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Dear Ms. Stahly,

It is impossible for anybody to comment on forced pooling without knowing what state in which the minerals are located. From your profile, you say that you have mineral interests in Colorado, so I will go with that.

The landman is a fool to play the forced pooling card on a lease that expires in 8 months or so from now. FORCED POOLING is only applicable in Colorado for UNLEASED interests.

For some general information on forced pooling, read this newspaper article:

http://www.denverpost.com/business/ci_18678240

For more detailed information on forced pooling, the Colorado Statute is located here:

§ 34-60-116. Drilling units - pooling interests

As to a recommendation on how to proceed, it depends on the size of your tract and a great factor could depend if you owned the surface of the land and what your use of the land is.

Most people do not get professional representation. I think that in many cases it makes sense to have someone in your corner, whether it be a competent oil and gas attorney or a professional negotiator or mineral manager.

As to what to do now, you do not have to do anything. You are under lease. Would you share the oil company's name and the landman's name and what county the property is located?

Best

Buddy Cotten

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Hey Buddy,

Sorry for the delay in response. The landman works for Contex Energy and his name is Calvin Meyer. We decided to hold out and wait for a better offer but we continue to get a phone calls. We are now receiving phone calls for a Senior Landman, Ashley, who is employed with Conoco directly. She has informed us that the offer will not change from the $750/acre and that this far, 90% of the landowners in our section have signed. She discussed forced pooling and said that with the majority signed, we will eventually be forced pooled with a decrease in royalties, from 20% gross to 17% net profit. At this time, she is offering us 750/acre and a reduction of royalities from our 20% gross to 17% gross because they also want to change the royalities to net profit which we have also said no to because our present contract is written as 20% with gross profit. What would you advise because we feel as though they are trapping us into a corner and our lease doesn’t expire until June 2015. Thanks in advance! Desirae

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We own 41 acres, both surface and minerals. Forgot that part!

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Dear Ms. Stahly,

There is no incentive on your part to act now, unless you want to get the money this year. I do know that they will want to extend the base lease. In all likelihood, the base lease needs to be trashed and a better, more comprehensive lease negotiated.

Best

Buddy Cotten