An oil and gas lease can provide mineral owners with a steady source of income. It can also be a source of obstacles if you are not well-prepared.
As a mineral owner, you may be approached to sign an oil and gas lease agreement with a company. This step usually comes after the company has already done its due diligence, ensuring that you own the mineral rights to the desired land.
What is an oil and gas lease? It’s a legally binding agreement between you, the mineral owner, and the specific person or company that will extract oil and/or gas from below your property in exchange for royalty payments. These contracts detail how the exploration and production (E&P) of the minerals will happen, and they define how payment will be issued to you, the lessor.
But just because a company has signaled that it’s ready to take the plunge doesn’t mean you need to be ready, too. When it comes to leasing your assets, you’ll want to understand what a lease should include and how you can ensure your rights and property are protected.
Elements of an Oil and Gas Lease
Every situation and lease is different, so it’s important to seek counsel when reviewing a contract. Here is a glossary of elements you may see on an oil and gas lease agreement:
- • The Granting Clause. This clause lays out what rights you’re granting someone in regard to oil and gas extraction and which activities are permitted within those rights. It can encompass a wide variety of activities, including drilling, surveying, transportation, and storage, among others.
- • Damages and Unexpected Costs. Oil or gas extraction can alter the land or other things on it, such as your home, crops, or water. The oil and gas leasing process is when you’ll want to negotiate how you’ll be reimbursed for any unforeseen changes or alterations.
- • Fees and Taxes. A gross or cost-free royalty provision puts a limit on the fee amount that can be taken out of your royalty payments. Depending on the oil and gas lease regulations in your area, you could also face additional taxes. You’ll want to consider who is responsible for paying those taxes and which fees can be subtracted from your payments.
- • Lease Term Limits. There are usually two parts to a term clause in an oil and gas lease agreement. The first is known as a primary term, and it generally lasts between five and 10 years. The second is known as a secondary term, and it essentially continues the validity of the lease as long as there is production and/or other drilling activities as specified in the lease. If you would prefer to set more concrete limits, then you’ll want to review this aspect of the lease.
3 Tips for a Successful Oil and Gas Lease Agreement
Of course, knowing what’s included in an agreement is important, but it’s only one piece of the puzzle. Next, you have to figure out the best way to approach negotiations in order to ensure you get everything to which you’re entitled. Here are some tips to consider:
1. Perform your own due diligence. It can be beneficial to do some research on the company or individual looking to lease your mineral assets. This is also the time to determine if the proposed oil or gas extraction presents any risks to your property or other assets.
2. Partner up with experts. An attorney who is well-versed in this area of law can be a major help during contract negotiations. It’s also advisable to enlist the help of experts in mineral rights management and oil and gas operations, like Valor, to help you more effectively manage the assets that lie beneath your soil. Attorneys and mineral management companies like Valor can help negotiate the best lease terms and the highest lease bonus payments. After all, they’re familiar with the market, have access to lots of data, and know which terms are best for a given location.
3. Don’t negotiate at face value. The old adage “trust, but verify” is a good rule of thumb for the oil and gas leasing process. The other party could make a mistake or put a spin on facts that makes it difficult to discern the plain truth. The negotiation process can feel rushed, but ensure you take as much time as you need to go over your contract and verify what’s being said.
An oil and gas lease can provide mineral owners with a steady, long-lasting source of income. However, without the proper protections in place, it can also be the source of some serious headaches. That’s why it’s important to go into the process without a deadline in your head and with enough knowledge to ensure you’re getting everything you want out of negotiations.
The information provided by Valor in this blog is for general informational purposes only, not to provide specific recommendations or legal or tax-related advice. The blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
