General Oil & Gas Lease Question

Do either of these two items command larger royalty percentages and/or bonus money when negotiating an oil & gas lease:

  1. A large contiguous tract of land (one owner versus multiple owners)

  2. Surface owner owning 100% mineral rights on 2/3’s of the contiguous large tract

Seems like it would be less of a headache dealing with one owner versus mutiple owners and finding long-lost heirs, etc. owning mineral rights on a tract of land.

Or does it even matter? .

Captain Skittles:

As a rule, these are both favorable conditions for a landman doing record research as it makes his/her job much easier. The bonus depends on the area where the minerals are located as "proven" areas will command a higher bonus whereas an area on the outskirts of a play will get less bonus money. The royalty percentage is what both you and the operator can agree upon but I would do some research as to the current royalty rate for a particular area.

Also, your definition of a large tract of land may be different than theirs. How many acres are we talking about?

Dear Captain,

From my experience of over 35 years of buying leases, I have always had better success (from the oil company side) in negotiating with large tracts (over 2000 acres). The reason for this is that the sum of the bonus per acre and the acres totals up real quickly that some landowners just cannot say NO to.

If you have 2000 acres and I offer 250 per acre, that is a check for one person of a half a million dollars. My authority might be 300 per acre, but a half a million is tough to turn down for a lot of people.


Your questions and concerns are directed at a very small portion of the very large risk cost of drilling a well. To the exploration company the risk to reward ratio must warrant the total cost of leasing, permitting, drilling and completion costs. If the cost of leasing makes the total cost too high they won't pay to explore their geologic ideas which are at the heart of all exploration projects. The companies don't drill because they have leases, they drill because they have leased over a strong geologic prospect that if successful, will make it worth their economic needs (potential returns) to stay in business.

For the mineral owner, the key is to know how much the exploration company will pay for bonuses and how much of the production they are willing to give up in royalty to obtain their needed return on a huge investment. The big responsibility the mineral owner has to himself is not how much cash he can generate up front but how much cash he will get from a successful well's production. And that means not only the percent royalty but how that royalty payment is protected by the terms of the lease.

So your concerns may not really matter except in the short term. In the long term you are risking your asset by tying it up and you hope the exploration company will risk its funds to prove production. The lease broker is a hired gun in this transaction and has no significant risk at all.

Very well said Gary.