We have been offered a lease in Pecos County for a 3 year primary term at $400 per net mineral acre and 25% royalty. The lease includes an option to extend for an additional 3 years at $400. My question is the 3 year extensions option a good deal or should we negotiate to eliminate or reduce that proposal?
An option is always a plus for whoever has the option. IF in 3 years the going rate for leases is $1000/nma, and they haven’t drilled a well, then they effectively can lease you for under market (i.e. $400/nma again). If in 3 years nobody thinks this is worth drilling at all, then they just pay you nothing and walk away. They have the option.
It’s probably not a huge plus, but it’s a little bit of a plus for them. There is lots of Pecos that isn’t very great, it may just be worth it to you to get leased and not sweat it. You push back and they may reduce the bonus.
Is $400/nma good? (I don’t know). Where is this?
That can tie up your minerals for quite a long time. I had a 2 year lease, with a 2 year option that I didn’t negotiate hard on because I needed the money at the time. The option expired before they drilled, but they came back to negotiate a new lease, and I got both my royalty percentage, and my bonus payment up significantly. The bonus went from 300 per nma, to 1000 per nma. They were willing to go up because they had proof oil was in the area in paying quantities. I would look around your property for production in the area and see what potential you may have. Without that knowledge, its hard to determine if 400 per nma is a good deal or not.
Option only helps the Lessee and ties your acreage up for an additional time. Never take the option. They are just trying to get something for nothing. It should not hold them back from doing the lease if they are actually intending to drill and not just flip the lease.
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I agree with previous comments. The benefits of an option are to the lessee (operator). But within reason I don’t think it hurts to see what you can negotiate. You don’t say how much mineral interest you have, which can impact your negotiating leverage,
If they claim they need the potential of more than the base 3 year term you might say you’d be willing to do a paid up 5 year lease with no option, or would agree to the three year option if the bonus on the option increased to say $600. There’s no guarantee you would end up getting that higher bonus but the change would give you some upside benefit if the lease market improves.
Try checking with folks around you and see if they’ll share what kind of offers they’ve received and possibly consider negotiating as a group.
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NEVER! Most of the time if they pay the option term when it’s time you could have probably got a lot more! I had one lease with EOG that had an option and they wanted to pay 1/2 of what the option amount was supposed to be. I refused and they tried to “strong arm me” and I had it written into my lease that they had to give me a release and a filed mark copy.
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Thank you for all the great feedback. Much appreciated.