A: If you own mineral rights, do not be surprised if one day a landman knocks on your door to offer you an oil and gas lease. If this occurs, listen to what the landman has to say, and questions

Typically landman will tell you what the lease bonus and royalty rate being offered is

You should also ask the landman whether any of your neighbors has been offered an oil and gas lease. If so, who, and what bonus and royalty have been offered?

What are the oil and gas company’s plans for the area that you live in?

Has the oil and gas company started to drill in your area? If so, where? If not, when does the oil and gas company expect that it will start to drill?

You may not receive an answer to some of your questions; however, you may receive some information that may be of some benefit to you in the leasing process.

The landman may give you certain documents. Take the documents, review the terms, and negotiate before accepting an offer / signing.

A: You will receive an oil and gas lease

You may receive a memorandum of lease. The memorandum of lease is a short form version of the oil and gas lease. The memorandum of lease is recorded. The full lease will not be recorded but will be retained by the Lessee.

Offer Letter: This document normally states the lease bonus that the landowner is to receive, what will be done by the oil and gas company in deciding whether to accept the lease that you have signed and when and under what circumstances you will receive the bonus. The landowner may not receive the bonus should the leasing company be unable to verify your mineral ownership.

Make sure you have all of the appropriate documentation pertaining to your mineral interest. If you need help accessing this information please give us a call.

A: A paid-up lease is an agreement whereby a Lessor is paid the lease bonus to sign a contract as consideration.

At one time, oil and gas companies paid a delay rental payment to the landowner on a periodic basis during the primary term of the lease. Typically, the delay rental payment was to be paid on a yearly basis. While the delay rental payment was being paid, the oil and gas company could choose when to drill within the term of the lease and, unless they defaulted on the delay rental payment, a lease was considered to be valid. The delay rental payment has now been replaced with an upfront lease bonus.

Nowadays you see the words “Paid-Up Lease” at the top of any contract to lease your mineral rights which means that you will receive an upfront bonus for executing the lease. Unless stated otherwise, the oil and gas company is not obligated to drill during the primary term of your oil and gas lease. If the oil and gas company wants to extend the lease, it will have to comply with the provisions in the lease that allows the lease to be extended beyond its primary term, or negotiate new terms with the mineral owner.

A: If a lease expires, any capitalized cost of the lease becomes a loss, even though the taxpayer may subsequently obtain a new lease on the property. If prior to the expiration of a lease, a new lease is obtained covering the property, it is known as a top lease. In this case, the cost of the prior lease should not be allowed as a loss; and any bonus and other costs incurred in obtaining the renewal lease should be capitalized. In such event, the costs of both the old and new leases are included in the capital account of the property.

A: The landowner may expect to receive the bonus at the signing of the oil and gas lease; however, this is normally not the case. Once the lease is signed by the landowner, the lease is then given to the landman who takes it to the oil and gas company. The oil and gas company will then have a certain period of time, which is usually set forth in the order of payment, to review and accept or reject the lease. When the landowner is to receive the bonus payment depends on the provisions in the Offer Letter.

A: Royalty Rates vary from basin to basin ranging from a standard 12.5% in exploratory or legacy areas all the way up to 25% in some of the most prolific oil and gas basins.

Monthly Royalties are nearly impossible to predict but are based on a few factors including commodity price, royalty rate, pooling, number of wells drilled, and the amount of production from each well.

A: An oil and gas lease has what is known as a primary term and a secondary term. The primary term is usually a fixed period of time; e.g., five, seven, and sometimes ten years from the date of the execution of the lease.

The primary term can be extended into a secondary term, which can extend the lease indefinitely. The secondary term normally starts at the end of the primary term and continues “for as long as” or “as long thereafter as” certain activities take place and/or payments are made. For example, after the initial or primary term, the lease may continue for as long as production of gas is taking place from land that has been leased from the landowner or for as long as production of gas is taking place from lands with which the landowner’s land has been pooled.

The language that extends the lease into the secondary term needs to be reviewed with and explained to the landowner. Otherwise, the landowner may be at a disadvantage. The lease may continue for a much longer period of time than the landowner ever anticipated. If the provisions that extend the lease are unacceptable, an effort should be made to renegotiate these provisions.

A: A pooling provision in an oil and gas lease allows the oil and gas company to take all or a portion of the leased land and pool it or place it with other lands into a unit for the development and production of oil and gas.

This clause is important. It needs to be reviewed and explained. In particular, the landowner needs to understand how the pooling of the landowner’s land will affect the royalty that the landowner is to receive.

A: Being forced pooled means that your mineral interest is unleased, and a company has made a reasonable effort to sign you to a lease. A company then goes to the COGCC and applies for a permit to pool the acreage. What this effectively means is that the mineral owner will receive a 12.5% royalty until the oil company has recuperated 2x the cost of the well. Once that happens the mineral owner receives 100% of their mineral interest in proceeds but are also expected to pay their fair share of remaining costs, usually deducted from their income out of the well.

A: Yes, this may be possible. This is called a non-surface use lease.

A true non-surface use lease will contain provisions that state that no activity of any nature whatsoever can take place on the landowner’s land without the landowner’s written permission. If the lease is a non-surface use lease, it is important that the lease is reviewed to ensure that the clause that provides that the lease is a non-surface use lease does, in fact, say that. Some leases are titled or classified as non-surface use leases; however, a review of the non-surface use clause may allow the oil and gas company to come onto the landowner’s land under certain circumstances for purposes of development and production of oil and gas. Language can be crafted that will make a non-surface use lease a true non-surface use lease wherein no activity will take place on the landowner’s land without the landowner’s written permission.

A: Yes. The location of whatever is going to be placed on your land can be negotiated. This would include items such as the location of well pads, right-of-ways, pipelines, equipment, structures, facilities, and whatever else may be placed on your land. Location can be made subject to your approval. This can be done either through a separate clause or clauses in the lease, most likely in an addendum, or through a separate surface use agreement or, if applicable, a right of way agreement.

In negotiating your lease, you need to take into consideration what is located on your land and the purpose for which your land is being used. Are there structures on your land that need protected? Is your land being used for a specific purpose? Are there any trees or crops or animals that need protected? Are there streams or ponds or other sources of water on your land? All of these things and more need to be considered. If you do not consider them, if you do not negotiate approval of the location of operations on your land, you may find that the oil and gas company has the right to operate on your land in areas that you never expected or wanted.

A: Yes, but only if you own surface in the area as well.

In addition to a bonus and royalty, you can be compensated for the location of a well pad on your property, also know as a Surface Use Agreement, right-of-ways (ROW) for pipelines, and easements for access roads.

There are many other questions that a landowner may have about an oil and gas lease and the leasing process. These can be addressed by an attorney who has experience in oil and gas law. It is crucial that a landowner who has received an offer for an oil and gas lease has the lease and other documents reviewed by an oil and gas attorney. If this does not occur, the landowner can be placed at a serious disadvantage.

If you are approached with a lease, we can review the lease documents for you, explain them, answer your questions, draft an addendum, negotiate the lease and addendum, or help you through the process of negotiating the lease and addendum should you wish to do so by yourself.