Leasing Your Minerals
I briefly touched on this topic in an earlier post, but I thought it might be time to explore the issue in more detail.
I’ve been tracking a number of articles recently discussing the issue of leasing mineral rights. As oil and gas prices rise companies are increasingly interested in "locking up" prospects in the regions they deem to be most valuable.
What does this mean for you the mineral rights owner?
Foremost it is important to understand that an oil and gas lease is a legal instrument that is subject to negotiation and interpretation like any other binding legal contract. As such, there is no "standard lease form" even if someone claims that to be the case. Many companies do have their standard form from which they start the leasing processes, but there is not an industry standard.
Most oil and gas leases are divided into a number of sections. They usually begin with some language that dictates whom is leasing from whom. For example, Jane Doe is executing an oil and gas mineral lease between herself and XYZ Company. This section is typically followed by a legal description of the area covered by the lease or a reference to an exhibit if the area covered requires extensive description.
The sections that follow are typically the detailed provisions of the lease itself. These may include:
- The type of lease, paid up, delayed rental, etc. A paid up lease is one where the lease bonus is paid in advance whereas a delayed rental is paid over time.
- The royalty amount. For minerals owners, this usually ranges from 1/16 up to 1/4. This is the fraction of the total production that you as the mineral owner will receive. However, this does not mean that you will receive the entire fraction. If you have a 1/4 royalty and only own 1/2 of the drilling unit, then you would receive approximately 1/8 of the production. This fraction gets smaller and smaller depending on the size of the unit.
- Primary term. This is the section that describes the duration of the lease. As a mineral owner you will want this to be as short as possible to force the operator to drill quickly or else have the opportunity to re-lease your minerals (including a new bonus). The operator wants this period to be as long as possible to give them time to assemble more leases in the area, prepare for drilling operations, etc. They also would prefer not to have to pay you another bonus or a higher royalty if a new lease is negotiated.
- Operators are increasingly trying to pass on their production costs in the form of marketing, transportation, gathering, etc. onto mineral owners. The legality of how this is pursued can vary from state to state but as a mineral owner it is in your best interest to negotiate these costs out of the lease in order to receive the largest share of royalty income.
- Another provision to a lease might include a Pugh clause, which if part of the leased premises is included in a pooled unit or units, then, at the end of the primary term, only the land that is included in a pooled unit or units shall continue to be held by the lease. The balance of the acreage shall revert to the mineral owner.
As you can see I’ve only touched on a few of the items in a lease. If you are the surface owner and especially if you own the site where they operator intends to put the drilling pad, you’ll want to include provisions that protect your property from damage and ensure that you receive compensation in the event there is damage to your property.
It is important to understand that a lease needs to be appropriate for your particular situation. If, for example, you are in a position to wait before receiving any income from your minerals, it might be beneficial for you to accept a lower lease bonus (or none at all) in exchange for a higher royalty. If you would like to receive a larger lump sum of money up front you might want to do the reverse.
Please remember the views expressed in this entry are my own and should never be substituted for professional advice from an attorney or your accountant.
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