Catherine,
I don’t know who specifically might be leasing in your location but posting your legal description (at least Section, Township, Range) might generate a few leads.
Every lease is negotiable in terms of the specific language, clauses, lease bonus, and royalty rate. As with any bidding situation, it will generally serve you well to get offers from a few different companies.
I cover this in a lot more detail in a blog post on my website and in a podcast episode. Here are some of the high points:
Keep in mind that what companies are willing to offer will vary greatly depending on location. It boils down to supply & demand. In a Township that has a lot of well permitting, drilling, and multiple companies leasing minerals (e.g. high demand), you will have more negotiating power and may be able to get a higher lease bonus and royalty rate as compared to areas that are far away from the activity but in the same county. Also, the size of your tract also comes into play – if you own a large tract (in terms of Net Mineral Acres) then you have more bargaining power as well.
Make sure it is in writing!
Do not agree to an oral change. What you sign at the end of the day is what counts and not what the company promises. Make sure all agreements are in writing and are placed in an addendum to the lease. Whenever possible, get the oil and gas company to sign the addendum. That way they can’t claim that you added the addendum without their knowledge.
Due Your Diligence
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Research who you are dealing with on the internet! Do a quick Google search of the company that wants to lease your minerals. This is especially important when dealing with an unfamiliar oil and gas company. Your state oil and gas commission website is also a good place to start. There you will find the number of drilling permits, how many wells it currently operates, production history, and listing of any notices of violations. A reputable oil and gas operator is always preferable to dealing with a new or unproven company. Keep in mind that some operators hire contract landmen to lease land on their behalf. You should be able to ask the landman who they are representing. If they won’t say then consider this a warning sign. It is possible that they are just speculators that are leasing in your area and will simply flip your lease to another operator.
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Research activity near your property. Go to your state’s oil and gas commission website. Most have an online map interface that allows you to look at where producing and permitted wells are along with the township section range (or in Texas the league, labor and block). You can reference the legal description of your property and locate the appropriate section to see what activity is going on.
Many states also allow you to look at pooling and spacing applications and orders. You should be able to search by Section, Township, Range to see what is out there.
Another valuable tool is your county clerk and recorder’s website. There you can look up recorded leases (usually by legal description) so you can see what royalty rates are currently being offered.
- Search by document type and/or legal description
- Sometimes a memorandum of lease is recorded instead of the lease itself. A memorandum of lease will show names and addresses of the parties, legal description, effective date, and length of primary term but does not include the terms of the lease or royalty rate.
- Look for lease document itself as it will show the royalty rate.
- Some counties require you to pay a couple of dollars to download a .pdf of the document
Lease Forms
There isn’t a standard lease form used in the oil and gas industry. The initial agreement may not be in your best interest so be sure to read them carefully. Remember that leasing minerals is a business negotiation.
Clauses
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Primary Term – this sets the time frame for which the operator must drill a well (or commence drilling operations). You should try to keep this as short as possible to help encourage the company to drill within the primary term. In general, try to avoid agreeing to a primary term that is longer than 3-5 years.
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Option to Extend the Lease – some leases will offer a designated additional bonus amount if the exercise the option to extend the lease. Some companies will offer something like a 3-year primary term with a 2 year extension. Agreeing to an option to extend the lease may put you at a disadvantage if activity increases significantly to where you could negotiate more favorable lease bonus and clauses after the primary term of the lease expires.
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Royalty Clause – This part of the lease outlines the percentage of the production that you would keep when a well is successful (this section will usually include language that converts this percentage into cold hard cash based on certain terms). That way you won’t have to take in-kind payments in oil. In the past, the norm was a 12.5% (or 1/8th) royalty but now royalties between 18.75% and 25% are commonplace. Remember, this is negotiable.
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Post Production Clause – This is just as important if not more so than the royalty rate you negotiate. Companies will often include language that allows them to deduct certain costs from your royalty payments. Marketing, transportation, treating, dehydrating, compressing, processing, and other costs can have a significant impact on the amount of your royalty payment. This is a tricky subject because laws have enforced these deductions when an issue has gone to the courts. Generally, you may want to consider language such as requiring that the royalties will be free of both “production and post-production costs”. Also, include language that bases your royalty payment on the actual proceeds received at the point of sale in an arm’s-length transaction vs. at the wellhead. If the company won’t budge on cost free provisions, you could try to limit the deductions to a certain percentage per mcf of gas or barrel of oil produced.
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Pugh Clause, or horizontal severance clause . Before we talk about a pugh clause, it helps to understand the concept of pooling which involves combining a lease with other leases to make up enough acreage to create a unit per the respective state oil and gas commission’s spacing orders for that section or sections. Leases will include pooling clauses that allow for placing your acreage into an oil or gas unit. Language is often included that allows for any operations that occur on any part of a pooled unit to be considered as operations under the leased premises. This is where the Pugh Clause comes in. A Pugh clause allows for splitting out pooled acreage from the rest of the lease. This becomes important if you own a large tract of land that might span multiple units. In the absence of a Pugh Clause, you may be faced with the situation of a small unit holding the rest of your acreage by production such that you could not lease the other acreage until the producing wells are abandoned. For example, if you owned all of the minerals in a half-section (320 acres) and the oil and gas company drills a vertical well and creates a non-pooled 40-acre spacing unit. When the primary term of your lease ends, this 40-acre unit would hold the entire 320 acres even through only 40 acres is being produced. Be careful to double check the legal description in the lease and ask to split into separate leases if you own multiple tracts that aren’t adjoining. This is the safest way to avoid any issues with any unintended pooling of non-producing acreage.
Final thoughts on leasing: consider hiring an attorney in your state that is experienced in mineral law to review the lease and help add language that will protect you as it relates to these and other clauses. Trying to go it alone can end up costing you more money in the long run (in terms of extra deductions from your royalty check).
Remember, most operators just want to strike a mutually beneficial deal that will allow them to develop your acreage in an economic fashion. That said, you still need to protect your interests! This can be an important negotiation that can have significant financial consequences for you and your family. Be sure to do your research and hire competent advisors to help ensure the best outcome. There is no reason this can’t be a positive event for you and your financial legacy. At the end of the day, in basins with a lot of activity have many companies that are actively leasing minerals. If you can’t come to terms, you can consider contacting other reputable operators in your area to see if they are interested in leasing your minerals. It doesn’t hurt to have a few offers on the table that you can use as leverage in your negotiation.
This information is being shared for educational purposes only. This is not to be construed as legal advice! When in doubt consult an attorney in your state that is experienced in mineral law.
You can check out the full blog post for info on 5 additional lease clauses to consider.
I hope this helps!
Thanks,
Matt Sands