We’re in negotiations for a lease in Stephens County. The landsman is saying it is a three year lease with an option to extend for two years at 100%. Can someone explain what the 100% means?
Thank you in advance.
Beth Allen
Personally, I would not consider the two year option. In my opinion, five years is too long for a lease. The “100%” might mean the same bonus as you receive now, but you should have them tell you directly the actual dollar amount. I tell land men that I do not consider options. If you have not leased recently, it would be very wise to have an oil and gas attorney read the lease and make the necessary edits. The drafts are rarely in the mineral owner’s favor and there are some significant changes that may need to be made.
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Seconding what M_Barnes said, options are a real advantage to the operator/lessee but just risk for the mineral owner.
If operators can tie up acreage on a 3-2 have the same benefit as with a five year lease while only out of pocket 3/5ths of the bonus. In three years if they are still motivated about the acreage they pay the other two years bonus, but if they’ve cooled on the project they let the lease expire. If it turns out leases are going for higher bonus amounts three years down the road the mineral owner is still locked in to the original terms. The option is strictly in favor of the lessee.
If you want to try some negotiation you could say you’re not interested in the 3-2 as proposed but might consider one with a higher bonus for the option (like, 150% of the original bonus), or if they have to be assured of having more than 3 years you’ll consider doing a flat five year lease for a significantly higher total bonus.
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Isn’t the option an option??? After the 3yr contact you can opt’d out of the 2 yrs…. The reason they want the option is in case after 3 yrs, if it looks favorable they might want to drill. We had that happen in Texas. At the last hour of the 3 yrs they did drill… now we have 4 wells… check with a lawyer …
If the bonus is a meaningful amount of money for you today, you might consider that it might not be worth losing that opportunity because of being high centered on the 2 year option. I have benefitted by having an option. The company executed the option–check by overnight mail–after I reminded it that the lease was to expire in a few days. Another benefit was having no back and forth negotiations trying to get another lawyer-approved lease (which was also acceptable to the company). The price of oil can drop and/or a company can cool on what it once thought was a hot prospect. That second bonus check was helpful and appreciated.
If you are saying your lease provided for a 3 year primary term and a 2 year option that was worded in a way giving you as the mineral owner the choice of whether to allow the lessee/operator to exercise the option, and that you forced the operator to drill before the 3 year term expired by not granting them the additional two years, that was a very different kind of lease provision than what’s being discussed here. In a typical 3-2 the only party who controls the option is the lessee.
AJ…unless you and Dennis are talking about some very unusal kinds of option provisions I’ve never seen…when you say “that second bonus check was helpful and appreciated” I think you’ve got to keep in mind you only received that second bonus payment because the lessee elected to exercise their option. The lease didn’t require them to.
If you only see benefit, and no downside, in avoiding future lease negotiations or potentially having to pay for more legal advice by committing your property for a total of 5 years, then negotiating a flat five year lease term to begin with and been assured of getting bonus payments equivalent to 5 years paid at the time the lease is signed would be a better deal. Personally I’m looking for the most bonus for the shortest lease term (along with best royalty and extra provisions possible). Maybe it turns out the first offer is all they’ll do and you’ve got a decision to make. But if you don’t at least find out what bonus amount they are willing to pay for a five year term versus the 3-2 deal they’ve proposed, or whether they’ll sweeten the deal in some other respect to get that 2 year option, you can’t judge the risk and benefit you are measuring.
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Dusty1, The company would not have remembered to extend the lease had I not contacted last minute. Yes, I was told this, it is not conjecture. And I started my earlier post with, “If the bonus is a meaningful amount of money for you today.” A Jedi wouldn’t need to let the Wookie win.
Understood, AJ. It’s always a balancing act to decide when pushing for more no longer makes sense.
My point on your example was, the folks holding your 3-2 lease must have still be motivated about drilling or your call to remind them about the expiration date wouldn’t have made any difference. Maybe you couldn’t have negotiated a flat 3 year lease when you did the 3-2. But if it had been a flat 3 year lease and the lessee somehow let it expire when they were still motived to drill they would have been contacting you wanting to negotiate an amendment to extend the term and put you in a position to have some serious leverage on what you would accept.
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If the “flat” 3 year ogl expired due to no production, the lease would be open and an amendemnet to extend the terms wouldnt be needed, a new oil and gas lease would be. Above you stated that they should have negotiatied a “flat” 5 year lease, thats basically what the original poster was offered, a 3 year lease with a 2 year kicker at 100%. But it all depends on the operators in the areas and oil/gas prices at the time of signing the lease. Sometimes, a 2 year kicker with the 100-150% 2 yr option is a great benefit to the mineral owner, but theres no right or wrong answer as nobody knows what will happen 3-5 years from now