I own land in Kentucky that has an old oil well on the property.
I’ve been approached by an oil company to lease the well and be paid a royalty. I am a little hesitant since I have zero experience on how a lease works.
I have a few question:
As the land owner am I responsible for any environmental issues should they happen. I am scared to death of a spill or oil fire that I will be liable for and possibly sued. I am hoping the oil company is liable for everything and not me as the land owner.
What is a typical royalty paid to the land owner?
What is the typical lease term? And at the end of the term if things aren’t going as planned can I simply to renew the lease?
As the land owner am I liable for any accidents to anyone working on the site?
How are royalties usually paid? On the amount of oil produced? Or straight monthly payment that never changes?
6 my biggest concern is me as the land owner being liable for any accidents such as a spill, contaminating water, fire at well, EPA issues, Etc. This keeps me awake at night.
Should I have a lawyer read the lease agreement or is this a standard state document?
Does the state inspect the well is safe before pumping begins?
Is the oil company liable for any property damage.
When pumping is complete, does the oil company return the site to its original state? Remove all holding tanks and any other related items?
Sorry for all the question, but I’m new to all this.
Thanks
Hi Kentucky_69rs327, for liability issues you should definitely discuss this with your insurance agent. Discussing this and the lease terms with an attorney is a prudent idea.
Typical royalties are for 1/8 to 1/4 of the oil (and maybe gas) produced.
The actual multiplier also depends on your percent ownership of the lease area of the well.
Leases often have a primary term of 2 - 5 years, but can be shorter or longer. If a producing well is drilled, the lease may last decades as they often continue for as long as production continues. If a well
isn’t drilled in the primary term, the operator might want to renew.
Renewal options may be discussed in the lease.
Site damages and restoration are also often part of the lease terms as well. For these reasons, there is not a standard lease, as each site can have specific agreements.
1.Discuss with your insurance agent. Typically, the land owner is not liable if you are not a working interest owner in the well. However, you want to make sure that YOU are protected. Usually there is a surface lease if the surface location is on your property. The surface lease is separate from the mineral lease. You want site restoration, etc. You might see if the Kentucky universities have a standard lease posted. That is a good guide. Get an attorney to review all leases and negotiate for you. The draft one the agent provides is not in your favor.
2. Royalty varies by reservoir and market conditions.
3. I prefer shorter leases with not option to renew. Three years is pretty common.
4. See #1. Talk to your insurance agent. If there are any dangerous conditions already on your land, would be a good time to get them rectified.
5. Usually paid month to month according to the sales from the wells. Oil is generally a month after sales and gas two months after sales.
6. YES, YES, YES. Especially since you are both the landowner and the mineral owner.
7. Probably not. The operator is required to abide by the Kentucky oil and gas law and regulations. They have massive rules that they have to follow.
8. That is why you have a surface lease-to protect your land value. Get a good attorney to review the surface lease.
9. Depends upon what is in the surface lease. That is what you want!
10. You have asked excellent questions-keep asking!
Since you are new, there are many resources where you can get informed.
-Look at the Mineral Help tab at the top of the forum page
-Go to the Kentucky oil & gas website for your state and read everything you can get your hands on.
-Consider joining NARO-the National Association of Royalty owners. They have webinars, conventions, reading materials, etc. They advocate for the mineral owner.
-You will need a good oil and gas attorney to get this first set of leases looked at.
-Keep asking questions!