For many the offer of an oil and gas lease brings with it the hope of great riches and the prospect that other financial needs or difficulties can be met through regular, monthly royalty payments. While many land or mineral owners believe the best way to encourage development is to sign an oil and gas lease as is, this just isn’t the case. Keep in mind that the oil and gas company’s objective is to pay you once and then hold your acreage and lease as long as possible. In trying to maximize returns on oil and gas leases, we want to ensure that an oil and gas lease is crafted to spur development or see to it that the lease expires. If an oil and gas company is not going to develop your property, then we want to ensure that you can move onto the next company who will. If you are a land or mineral owner hoping to encourage development or maximize your monetary gain from oil and gas development then consider asking for the following as part of your negotiations:
- A shorter term. By asking for a shorter term you will see development sooner, or if you don’t see development, then your lease will expire. With expiration of your lease, then you should also procure an additional bonus payment. Also, consider shortening the other time periods (typically references to days) that are also included in your lease offer to move development along.
- Higher royalties and bonus payment. Many out there don’t realize that they can ask for more than is presented in an offer. As with all negotiations, politeness is always appropriate and it can’t hurt to ask. Utilize the county pages of this forum to determine what an appropriate bonus or royalty amount is to make sure you are making an appropriate request.
- Pugh clause, or at least a continuous drilling Pugh clause. If your acreage in excess of 40 acres, then ask for a Pugh clause, which will ensure the release of non-producing acreage. For example, if you own property in Sections 2 and 18, you don’t want a well in Section 2 also tying up the acreage in Section 18. With the release of non-producing acreage, then you can lease at least part of your acreage again. Alternatively, if a standard Pugh clause isn’t accepted, then at least ensure you have a continuous drilling Pugh clause that will only hold multiple tracts if the operator continuously moves toward development of your property.
- Changes to the Shut-in: Following some drilling or development of your property, the shut-in clause is often used to hold leases for many years. See my earlier blog post on changes to the shut-in royalty: Shut in Royalty Clause Provision Often Forgotten
- Eliminate Extensions. Many leases provide extensions. If an operator knows they have the right to extend the lease, then they may pass development of your property over for a lease that doesn’t have an extension. Also extensions rarely work to a land or mineral owner’s favor as the discretion to exercise such option is entirely with the oil and gas company. If prices have risen, they are sure to exercise their option; however, if prices or interest has waned, then they will likely decline to exercise the option to extend the lease without any resulting benefit to you.
There are many tactics and requests that are made in oil and gas lease negotiations and above are just a few basic items to consider. Above all, if you are concerned about maximizing your return on oil and gas development, know that signing a lease as offered is unlikely to achieve that goal.
Jenna H. Keller, Esq.
Attorney at Otis, Coan & Peters. (www.nocolegal.com)
Jenna H. Keller defends property rights and provides legal services to farmers, ranchers, rural property owners, and severed mineral interest owners in the areas of estate planning, natural resources (oil, gas, wind), real estate, and water.
The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.