Article Index

Basic Description of Oil and Gas

How Gas Leases differ from Oil Leases

How Royalties are Calculated

Mineral Rights in Oil and Gas Lease

Oil and Gas Lease Negotiation

Oil and Gas Lease Terms

Oil and Gas Royalties

Description of Oil Lease

Oil Lease Sale

Oil and Gas Pooling

Basic Description of Oil and Gas Leases

The parties and their interaction in an oil and gas lease

A landowner who owns both the surface rights and the mineral rights to their farm is usually approached by a landman to begin the leasing of the mineral rights. The landman, more often than not, works for an oil company and is a vital part of the oil company's exploration team. This exploration team is assigned to your area and looks for land to lease for exploratory drilling. An oil and gas lease is created by the oil company after the landman has studied geologic maps of the area and researched deeds and acreage at the local courthouse. It is necessary to determine who owns the land and the mineral rights, since only the legal owner can be named on an oil lease. There is a lot of homework on the oil company's part before a landman comes to discuss an oil and gas lease.

A landman only comes to a landowner when all the pieces of the proposed oil or gas lease are in place. Now the negotiations begin in earnest with each landowner and farmer in the designated area. Titles are researched and blocks of land are put together to create the lease area.

Most farmers and landowners are aware that various states, in fact the majority of states, separate the mineral rights from the surface rights of the landholding. Therefore, the landman, the exploration team, and the oil company ensure ahead of time that the landowner does have the right to lease the mineral rights according to the terms in the oil and gas lease.

After everything is in order, the landowner is presented with an oil or gas lease. The lease states the rights and the obligations of both the oil company and the landowner. If a landowner has very little experience with legal contracts and leases, the document can be sometimes difficult to understand.

The landowner is the Lessor and the company is the Lessee. When the landowner signs the lease, the owner will be given a "Bonus." The bonus is a sum of money, agreed upon both the Lessor and the Lessee to be given on signing of the oil and gas lease. If there are producing wells near the land, the bonus can be substantial. If there is no drilling yet or none of the existing wells are not producing, the bonus will certainly be low. The landowner should check with the other landowners in the area and even somewhat further away to establish the amount of bonus the other landowners have received.

There is a length of time established in the oil and gas lease. It is called the "term." This is the primary term of the lease. Any additional amount of time after this leased time is called the secondary term. A secondary term can be written as for as long as the oil and gas are produced in paying quantities. The primary term is usually a fixed length of time, such as a year.

Another part of the oil and gas lease is royalty payments. It is an agreed on percentage of the profits of the oil and gas. The reasonable costs of the Lessee's operations are deducted first and the landowner receives a percentage of the remainder.

If the term of the oil or gas lease extends beyond the time that the bonus was paid, and a well was not drilled, then the Lessee is required to pay the landowner an agreed on sum. This sum could be $1.00 or more per acre. This is called a delay rental. The payment is due on or around the anniversary of the lease. Occasionally oil and gas companies pay this fee up front when an oil lease is negotiated and signed. The company's failure to pay a delay rental on time cancels the lease.

There are implied covenants that are part of the agreement, such as that the Lessee will protect the property from drainage, will develop the property after drilling the first well, will conduct all operations as a careful operator, and will attempt to secure a market for the oil and gas. The Environmental Protection Agency requires that the property be returned to a usable environmentally safe condition after drilling and production on the lease site has concluded.

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