A lease is a legal document or contract between a landowner (lessor) and a company or individual (lessee) granting exploration and development rights to subsurface oil and gas deposits.
Companies will usually present you with a preprinted or standard lease. Review it very carefully and consult an attorney or other professional who is experienced with oil and gas leases. Negotiate changes to meet your needs and protect your interests before signing. Get all agreements and conditions in writing.
Entering into a lease agreement does not necessarily mean a well will be drilled on your property. Also, remember that you are granting a right to others which may be viewed as an encumbrance on the property.
Key Components of a Lease
Cash Bonus – An up-front payment or bonus which is generally computed on a per acre basis for signing the lease. It is considered to be the first year’s rental.
Primary Term – The number of years that a lease is in effect. It can be from one to ten years or more.
Delay Rental – Annual rental payments paid to the lessor after the first year of the primary term, usually on a per acre basis.
Secondary Term – The duration of a lease is extended beyond the primary term if a producing well is drilled on the lease or if the lease is “pooled” with other leases to form a “unit” for a producing well. The lease is “held by production”, extending its duration, and expires when production ceases.
Royalty – Your share of the production from beneath your property. This will be referred to in the lease as a fraction – usually 1/8 of the value of the oil and/or gas produced and sold.
Shut-in Royalty – Payment in lieu of a production royalty. Paid when a well is “shutin” (capable of production, but not producing) for maintenance or other reasons.
Termination – Occurs when the primary term expires or when economic production ceases during the secondary term.
Before Signing, Think About…
Land disturbance from an access road and drill site. The actual drilling of a well is a temporary activity that may involve a large amount of equipment similar to other construction projects. Be sure that you know how much of your land and which parts of it will be used for access, drilling, production, pipelines, compressors and short or long term storage of equipment. Have mutually approved reclamation plans incorporated into your lease.
Damage to crops, buildings and other personal property. The lease can also be written to require fences or other safeguards if needed to protect people and/or livestock. If not covered in the lease, consider asking for terms that make the company responsible for damage to crops, livestock, buildings and other personal property.
Free gas. Leases may provide for natural gas for the landowner’s use if a well is drilled on the premises. If the lease does not specify that the company is responsible for the cost of equipment and installation, then you may have to pay for it. Because of safety concerns, the company may provide a monetary payment in lieu of free gas as an alternative.
Lease Assignment. The lease may contain a clause which allows the company to assign or sell the lease to other firms.
Underground gas storage. Gas production reservoirs are ideally suited for underground gas storage after the gas has been produced. The lease may contain a clause which permits gas storage in return for an annual rental payment. As with many other terms of a lease, this clause is negotiable.