One last issue! Can the compensation of a 2 year optional extension of primary term be expressed in a % of original offer instead of a $$ amount on the face of the lease?? I thought I have seen that somewhere. Sure could use that info about now!
Thanks
Don
Don: I don’t know anything about % of original offer but the advice I have been given on options to extend a mineral lease is just don’t agree to it as it is simply not a beneficial provision for the mineral owner. It is best to negotiate a mineral lease for a set primary term period. The rational for this is the value of your minerals may increase over time frame of the primary term, and perhaps significantly. With the option to extend the Operator is “locking in” a good deal for themselves and they still have to option not to lease for the option period. Secondly a shorter primary term means you may get a well drilled sooner than later. Also I have seen folks mention offers with option terms lower than the original term. What is that? A great deal for the Operator but for me would be insulting ones intelligence. I did agree to a 2+2 option to extend many years ago. The primary term of 2 years was for 300 bucks per acre, and the option to extend bonus was for 350 bucks per acre. The Operator exercised the option to extend and we ended up with 650 bucks per acre. This is still a judgement call for the mineral owners. An offer for the option to extend that is less than the original bonus offer would not be advisable and I would be a hard negotiator on that point. However, I would inclined to refuse to negotiate an option to extend in the first place.
Thanks Mike,
We got from 5yr to 3yr with option and same bonus . It is worded appropriately and I'm more than satisfied with our situation and didn't want $$ on lease face. I do understand your points. My feeling was by doing this THEY will get going sooner than 3yrs. and we won't have an issue here in the southern part of the Niobrara.
Thanks
Don
Am I missing something?
I am looking at a lease agreement that I received a week ago. The letter states $35.00 per net mineral acre, a primary term of 5 years ........, with an option to extend for 3 years, at a price of $26.25 per mineral acre.
The word additional is not included, thus lowering the price per acre - but the really confusing point is that the option to extend is no where in the lease agreement. Am I really being hood winked with this proposed lease?
So glad I started reading your forum - help
Duchess
Geeze! You are being asked to tie up your mineral property for eight years at very low bonus rates. I don't know what State/County your minerals are located in. The other issues are what is the geology of your area and production potential. Are there any nearby producing wells? What is the trend or play in your area? Is it oil or natural gas or both? Do you have any competition for your minerals in your area? Are you in a high risk exploration area where "wildcat" exploratory well is being planned or a low risk drilling area such as the oil and gas shale plays where commercial production is highly probable? All this can determine your negotiation position. My experience in Texas is that the average royalty rates being offered are around 20% and bonus payments can range from a hundred bucks per acre to thousands per acre in the known producing trends.
As to your question on the 3 year option to extend, the $26.25 per net mineral acre is lower than the original bonus payment for the primary term. This option term and bonus payment should be displayed in the lease agreement. Prior to the expiration of your lease primary term the Operator may exercise the option period to extend or let the lease expire. The Operator would send you the option period bonus check to extend the lease prior to the primary term expiring.
The typical recommended primary term to lease is 3 years in Texas. If you are in an area with good potential I would opt for the shorter primary term and no option to extend. If you are in a high risk exploratory area I could go a bit longer but that is a judgement call. Also I would advise having an Oil and Gas Attorney help you with the lease provisions and that is very important if you are also the surface estate owner and need protection on surface damages and potential drillsite location.
Mike,
Thanks for your answer, which raises many questions- this mineral rights only is in Johnson County, Wyoming -as far as I'm able to find out - no production within 10 miles. I have reread both letters from the Landman. The original did not state additional in regard to the extended lease (which I agree is totally too much) but the letter that came with the lease did say additional $ but this is not in the lease - My search for an attorney just became more important, right?
Mike Igau said:
Geeze! You are being asked to tie up your mineral property for eight years at very low bonus rates. I don't know what State/County your minerals are located in. The other issues are what is the geology of your area and production potential. Are there any nearby producing wells? What is the trend or play in your area? Is it oil or natural gas or both? Do you have any competition for your minerals in your area? Are you in a high risk exploration area where "wildcat" exploratory well is being planned or a low risk drilling area such as the oil and gas shale plays where commercial production is highly probable? All this can determine your negotiation position. My experience in Texas is that the average royalty rates being offered are around 20% and bonus payments can range from a hundred bucks per acre to thousands per acre in the known producing trends.
As to your question on the 3 year option to extend, the $26.25 per net mineral acre is lower than the original bonus payment for the primary term. This option term and bonus payment should be displayed in the lease agreement. Prior to the expiration of your lease primary term the Operator may exercise the option period to extend or let the lease expire. The Operator would send you the option period bonus check to extend the lease prior to the primary term expiring.
The typical recommended primary term to lease is 3 years in Texas. If you are in an area with good potential I would opt for the shorter primary term and no option to extend. If you are in a high risk exploratory area I could go a bit longer but that is a judgement call. Also I would advise having an Oil and Gas Attorney help you with the lease provisions and that is very important if you are also the surface estate owner and need protection on surface damages and potential drillsite location.
It could be helpful for you to contact some of your neighbors who have or are near producing wells in your County. I know there are some large acreage ranches in Wyoming, like South Texas, and this can also be a factor in your negotiations. I will see if I can find some info in Wyoming on terms. Do you know the geological trends being drilled in your County?