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Hello Reeves County,

Is anyone willing to weigh in on the pros and cons of lease "term" and the option or not having the additional option to be pick up. On a 3 year primary "paid-up" oil & gas lease is it good for the lessor or the lessee to give or deny the 3 year "option"?

Thanks in advance for any advice, suggestions given or things to consider.

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I don't think signing a lease with an option is a good idea.  If you're in Reeves, you can easily say no to any such request.  

Think about it like this.  You're granting the landman / lessee a free option.  If, at the expiration of your lease, they have not drilled, then the landman / lessee will exercise the option to renew the acreage if lease bonuses in your area are at or below the lease bonus that he owes you.  But if the lease bonus rate has crashed such that market rates are lower than your contracted lease bonus, then he will decline to exercise the option.  You are effectively agreeing to a scenario where the landman will only exercise the renewal option if he can do so at an at-or-below-market rate.  

Whenever I am in your shoes, I decline to grant a 2-year renewal option and instead take my chances renegotiating a lease at the end of the 3-year primary term.  Has worked out extremely well in the past.

Hey, JT - 

An Option to Extend for an additional 2 or 3 years locks a Mineral Owner in at a set Lease Extension Bonus Rate for when / if the company doesn't get around to drilling the land or including it in a Unit within the original 3 year Primary Term. 

As the companies drill wells in an area, the competitive value of Leases naturally go up. Most especially if the Wells are wildly successful, as many are in the Permian Basin. 

If you hold them to only a 3 year Primary Term Lease, when / if they come back in 3 years you may be able to negotiate for a higher Bonus Rate. Perhaps substantially higher. 

If they try and insist upon an Option to Extend, either negotiate for a straight 5 year lease and enjoy the extra money now, or negotiate strongly for the Extension Bonus Rate be something like 2 or 3 times higher than what the Bonus Rate is for the original 3 year lease. These are not uncommon options - I've successfully negotiated many Leases under each.

The thing with the Permian is, in 3 years the Lease Bonus Rates might be substantially higher than they are today, and they are already at never heard of before record highs.

But, as we have seen in the other major Shale Plays across the country, somebody might actually wake up some day and say "WTF were we thinking?" and Lease Bonus Rates and even the incredible amounts of money being offered for Mineral and Royalty rights will tank. 

The Permian is enjoying itself right now, and I wish you and every other Mineral Owner out there great success.  But there appears to always be a very thin line that you all have to walk on these kinds of inevitably temporary events. 

Hope this helps - 

Charles Emery Tooke III

Certified Professional Landman

Fort Worth, Texas

@ BGB & CET III,

Thanx for the wording that kinda supports my feelings about it. If prices go down they are just going to decline, if things are on the up they will likely be happy to renew at the old price/bonus. 

Permian Basin and Reeves County, the great Methodist Land Swindle land my family still holds. This is all very interesting and hopefully finally fruitful!

Spot on Mr Tooke!

      Been there and done that!  The first two year lease and automatic one year extension is all one should contract initially.  Any interest in extending the initial lease and extension by the buyer should immediately increase the bonus and the royalty initially agreed to, significantly!

JT, 

Unless your minerals are in the very Southwest corner of the County, there is to incentive for the owner to grant more than a 3 year lease for several thousand dollars/nma.  Even then, the option amount should be at least twice the primary term amount.  The drilling and investing activity is so high in Reeves now that the owner is in control.  The demand is huge but the supply of unleased mineral rights is very small.  

Most likely, the next lease will be our last so make it count.  Make certain you understand the measurement and payment of the royalty.  That is where the very big money from leasing will be.  The bonus will be minuscule by comparison to the royalty.  And don't bargain for anything less than 25% royalty.  The higher the royalty stream, the higher the amount an investor will pay for it should you ever want to sell.  

Yeah, it is much much more important to focus on how the royalty is measured and paid along with the lessee's right to hold the multiple producing zones forever from just one well.  It is up to the owner to protect the future rights that will surely come out of this prolific area.  Don't give them away for the sake of a bonus payment.  

From the leasing agent's point of view, he or she can sell a lease with an option to an investor for considerably more money than just a primary term.  Be patient and thoughtful in your decisions.  You may not get another chance.  

Gary L Hutchinson  

Thnx Gary,

I am thinking "NO" to the option. 

R U under the notion that there is finite oil left or that there is a time frame that science says can only last so long...? What time frame would that be in your estimate? This is all so interesting and we may be one of those few unleased spots left...

Reeves County oil is not homogeneous.  Send me a PM and location  and I'll give you an estimate.  

Gary H.

sent you a message G.L.H. !

Mr. Hutchinson,

      You are absolutely "Spot On" with your advice!

Stephen Watkins

JT

Many years ago, early 80's, a large infamous oil company (now defunk) had the option clause down towards the bottom of the form. Many signed away because $money was in their eyes. Obviously we all know we need to completely read the form or have an attorney quote you. In my xx years in the business, I have never seen an 'option' that worked out well for the landowner. Reeves is in that situation where the owner is in control as stated earlier but for how long. Hope we can assist in your decisions. 

We leased our Reeves property early this year allowing only one 3 year term. We have had several leases expire in the past with no activity on the property.

John sent you a message as well. Thnx

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