How bad is my lease? (Long post)

I recently bought some mineral rights that came with an oil/gas lease. The lease doesn’t sound very good based on my research, so I’d like to list some questionable sections from it and maybe learn from you guys so I can negotiate in the future.

  1. Primary lease term is 3 years then they have the option to pay $75/NMA to extend for an additional 2 years. Don’t give this option in the future, correct?

  2. Lessee covenants and agrees “to deliver to the credit of Lessor free of cost, in the pipe line to which it may connect its wells, the one-sixth (1/6th) part of all oil (including but not limited to condensate and distillate) produced and saved from the leased premises.” Is 1/6th pretty standard and is this worded as straightforwardly as it seems?

  3. “To pay Lessor for gas of whatsoever nature or kind (with all of its constituents) produced and sold or used off the leased premises, or used in the manufacture of products therefrom, one-sixth (1/6th) of the gross proceeds received for the gas sold, used off the premises, or in the manufacture of products therefrom, said payments to be made monthly.” I’ve read that “gross proceeds” is what we want royalties based on, so this seems good. Any red flags here?

  4. “During any period (whether before or after expiration of the primary term hereof) when gas is not being so sold or used and the well or wells are shut in and there is no current production of oil or operations on said leased premises sufficient to keep this lease in force, lessee shall pay or tender a royalty of ONE DOLLAR ($1.00) per year per net royalty acre retained hereunder, such payment or tender to be made, on or before the anniversary date of this lease next ensuing after the expiration of ninety (90) days from the date such well is shut in and thereafter on the anniversary date of this lease during the period such well is shut in, to the royalty owners. When such payment or tender is made it will be considered that gas is being produced within the meaning of the entire lease.” Well, this sounds like a disaster. Do you normally offer some sort of rebuttal to this language or strike it out altogether?

  5. " To pay Lessor for gas produced from any oil well and used off the premises, or for the manufacture of casinghead gasoline or dry commercial gas, one-sixth (1/6th) of the gross proceeds, at the mouth of the well, received by Lessee for the gas during the time such gas shall be used, said payments to be made monthly." I remember reading to watch out for “mouth of the well” language. Can you explain why the phrase is unfriendly to lessors?

  6. “If the Lessee shall commence to drill a well or commence reworking operations on an existing well within the term of this lease or any extension thereof, or on acreage pooled therewith, the Lessee shall have the right to drill such well to completion or complete reworking operations with reasonable diligence and dispatch, and if oil or gas, or either of them, be found in paying quantities, this lease shall continue and be in force with like effect as if such well had been completed within the term of years first mentioned.” Can there be ‘acreage pooled therewith’ that I don’t know about?

  7. “Lessee is hereby granted the right at any time and from time to time to unitize the leased premises or any potion or portions thereof, as to all strata or any stratum or strata, with any other lands as to all strata or any stratum or strata, for the production primarily of oil or primarily of gas with or without distillate. However, no unit for the production primarily of oil shall embrace more than 40 acres, or for the production primarily of gas with or without distillate more than 640 acres; provided that if any governmental regulation shall prescribe a spacing pattern for the development of the field or allocate a producing allowable based on acreage per well, then any such unit may embrace as much additional acreage as may be so prescribed or as may be used in such allocation of allowable.” The ‘strata’ language sounds like the opposite of the depth clauses that mineral owners are recommended to have. Does this give the operator explicit rights to all different depths?

  8. (Continued from 7) “Lessee shall file written unit designations in the county in which the lease premises are located. Operations upon and production from the unit shall be treated as if such operations were upon or such production was from the leased premises whether or not the well or wells are located thereon. The entire acreage within a unit shall be treated for all purposes as if it were covered by and included in this lease except that the royalty on production from the unit shall be as below provided, and except that in calculating the amount of any shut in gas royalties, only the part of the acreage originally leased and then actually embraced by this lease shall be counted. In respect to production from the unit, Lessee shall pay Lessor, in lieu of other royalties thereon, only such proportion of the royalties stipulated therein as the amount of his acreage placed in the unit, or his royalty interest therein on an acreage basis bears to the total acreage in the unit.” If the 'The entire acreage within a unit shall be treated for all purposes as if it were covered by and included in this lease…" that sounds like production occurring anywhere in one of these ‘units’ can keep my terrible lease active indefinitely. Please tell me that only my 4.7NMA covered in this lease would be held hostage while I would be free to lease my other 23NMA elsewhere? Maybe my entire 28NMA might fall into the “unit” and all be held by this lease of somewhere on the unit was producing?

  9. “Lessee shall have the right to use, free of cost, gas, oil and water produced on said land for its operations hereon, except water from wells of Lessor.” In the future, do we strike this?

  10. “No change or division in ownership of the land or royalties shall enlarge the obligations or diminish the rights of Lessee.” Is there a magical way around this?

I’m hoping that the operator chooses not to extend past the 3-year Primary Term or at least not past the 2-year Extension. Since the lease was signed 4/26/2021 and I haven’t seen new permits or anything, maybe there’s hope that the lease will fizzle out and I’ll have an opportunity to negotiate a potential next lease.

Thanks for any and all input, Nick

As with any contract, you should seek advice from professionals. An attorney would be the correct person to review. So any comments are just opinions. (Not giving legal advice in any way.)

In general, this is a typical “not optimal for the mineral owner” lease. Not knowing what state you are in, the 1/6th seems low, but if you are in a gas area, may be the going rate for your area. I never do an extension. Shut in terms are terrible. “Mouth of the well” language is an important term in some states and irrelevant in others. Tends to have post production charges in the states where the language is important.

Clause 6 is standard. Yes, you could be part of a pooled unit.

Clause 7 does include “all strata” as it is worded. Needs a depth clause.

Clause 8 needs a reading of the lease as a whole. Depends upon where your 4.7 NMA is located in the description of the lease. if your other acreage is in another section, it may not be included, but can’t tell at this point.

Clause 9-I strike. Clause 10 is typical. This lease doesn’t have protections in it that you would want such as a commencement of drilling, hard clause against post production charges, much better shut-in clause with higher payments and a definite time frame, depth clause, etc.

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Just a thought. If the ogl fizzles out, you’re assuming that there will be a next time. there might not be.

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MBarnes, thank you for taking the time to share your input here and all over this site. I intend to save your responses for future guidance.

Nick

Tim, thank you for the perspective. Because of it, I’ve determined to be grateful that I have a lease at all.

Nick