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 Keller Law, LLC. (www.kellerlawllc.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.
Can someone please explain the "division order" process.
Also ask for royaltys based on GROSS production instead of NET production.
jenna i agree with you 100% keep up the good info
I don't know exactly the workings of the division order process but when there is a well that is producing and it's the first run, they look at all the interest owners and their percentages. In order for them to pay those interest owners based on those percentages, they send our division orders showing you that informaiton and they need to be signed (notarized) and dated before you receive a check. If any one else can add more, please do so.
Ms. Carr, the division order is what the operator thinks your interest is and they are asking if you agree. You should check that the division order acurately reflects your interest before you return the division order. In some state you are required to return a division order and in some states you don't have to and they operator has to pay you anyway. I never return division orders for ND because I don't have to. With your rights in Ok, I think it likely you are required to.
I worked in the Division Order Dept. of an oil company. The first step in determining the payout on a producing well is for the operating company to have a title opinion prepared by the law firm they work with. The lawyer examines all transactions recorded relative the land in question in the county records to determine ownership. It's important that all changes in ownership be recorded at the time of sale, etc. The division orders are prepared according to the ownership reflected in the title opinion. The division order is a legal document, and by signing it, you are agreeing with the percentage of ownership reflected on it. The division order becomes the basis of payout made, according to the amount of production. There are production allowables, which means only a given amount of oil and/or gas can be pumped and sold within a given time.
Hi Cora...So when we get our division order you are saying that the title opinion has been completed by them (if there are no differences in what they found and what you think you have). That being said I was wondering if you feel you have more acreage than what they found before sending you the division order would this be the cause for you not getting the 12 % interest if they are over 6 months getting you the check? Or would it be according to which one of you were found to be right? Can you tell me? Thanks
The ownership set out in the title opinion is based on the examination of the public records. If there were ownership changes made but not recorded with the registrar of deeds of the particular county, there could be an inaccuracy. However, unrecorded transactions must be backed up by legal deeds or other proof of ownership and these instruments MUST be made of public record before they can be picked up during the examination prior to preparing the title opinion. If you are in possession of a division order that reflects a percentage of ownership in the 12.5% royalty that you do not agree with, do not sign the division order until you are in agreement with the operating company of the producing well. Keep in mind that when a piece of land sells, it is customary for the seller to retain 1/2 interest in the mineral rights, unless otherwise agreed upon at the time of the sale. If you feel you own a different fraction of the 12.5% royalty than is reflected on the division order, you must prove the ownership you claim to have. It is very important to record all deeds and bills of sale, etc. at the time of any change in ownership. The title opinion cannot and will not reflect any transactions that have never been recorded in the register of deeds office where they become part of the public records. It is customary for the operating company to obtain an abstract of title for the lawyers to examine, and all ownership is determined by what is recorded in the abstract. Keep in mind, please, that I worked with division orders many years ago, but I don't think things have changed much.
Cora...I've confused you I believe. The 12 percent interest was what Hutch and a few on here have talked about which is what the oil companies have to pay retroactive back to day the well started producing if they don't start paying you within that six months time of first production. (Hutch is still waiting on such a check). We didn't have a problem with the amount of acreage that they found on the "Branch" well but now they are going to start on one on Sec. 29 2n,4w on which our deed said we had 5 3/4 acres but the land men just came up with 3.75 acres. He said when we bought it from hubby's cousin that he must not have had as much to convey to us as he did. he didn't have much to convey as he thought. And he is right on that but he had more to convey that these guys found. We had leased it out before and they drilled a well which came in at 70 bbls a day but they later plugged. When we leased it then they found 4.375 acres (or something like that that P found) and sent us a check on that many acres before they plugged. My husband, P.., went to the courthouse Friday and checked it all the way back to his granddad who owned the land and the royalty and he found 4.375 (or close) acres and felt that to be right. Anyway all I was wondering is if they still come up with just 3.75 we will have to ask for further investigation on their part and would that delay cause them to only have to pay 6 percent (as we've been told) or if they would still have to pay the 12 percent interest to us? I may just be plowing up snakes and they may discover what P. did when they do the title search. In which case I'm sorry I wasted everyone's time including your in reading this book and I do appologize! Have a blessed night!
Another thing we noticed when they sent us the list of royalty owners they had listed "the Known and Unknown heirs" of the cousin from whom we purchased the royalty (he's still living and is an attorney in California and owns no royalty in Stephens Co. as he sold it all to us). Also they had his address as a Marlow one in care of one of P's cousins the IS deceased. They also had the same address for several of P other relatives that didn't even know the deceased relative who lived there. Those relatives didn't even know each other but had the same last name so I guess that's why they sent their papers to that address. Sooo, I said all that to say this, we kind of expect that to be a mess finding all the right people at the right addresses but it was clear to P after seeing the records just how the royalty owners came to be. Hope Continental people can.
OOPs, didn't get all of part of a sentence erased below so doesn't make sense, sorry!
Hi Jenna, you offer many good suggestions, are you able to practice in Texas. I noticed that your law firm is in Colorado? We may be seeking counsel to review our properties to make sure all particular details in regards to royalty and leases are being maximized. Thanks, Doug
Sliding scale royalty
Well obligation with penalty for non-performance
ALSO, if you are lucky enough to be the surface owner:
Define the surface use agreement in the lease itself, providing for:
Personal Injury Damage
Sell frac water @ 50-75 cents per bbl.
Dispose of frac water @ 50 cents per bbl
Prohibition of seismic surveys (negotiate later at a good rate -- both mineral and surface.
Provide for terracing if needed.
Provide for double H braced gates
Negotiate landfarming if you wish.
Road construction and maintenance
shallow water crossing with covered culverts
"Nuisance Penalty" and remediation
The list goes on and on.