I have just learned I have inherited mineral rights property in Pittsburgh for 5 acres in section 28-07N-13E. I share this lease with siblings. We have received an oil and gas lease proposal for a 3 year term at $500 bonus and 1/8 royalty. The lease, however, has several clauses that permit the lease to be in force even after the primary term has concluded and even when the wells are shut or without production on payment of $1.00 royalty per year. No mention is made of any lease renewals or bonuses. Is this typical? I would appreciate advice.
This is not financial advise and I’m not a lawyer. My first suggestion is to run the lease by an attorney if you’re able.
This must be a deep-rights lease for Woodford, under the Hartshorne, right? (since there are four producing wells already in the section). I’m a bit surprised you’re not leased already, but maybe it took some time to reach you. Sanguine Gas Exploration, LLC, filed in August 2020 to pool that section and the one to the north in order to drill 1280’ horizontal wells.
A few points to note:
- Leases can be negotiated and the first lease you see is hardly ever the most favorable. This one is a good example.
- 1/8th is low for a modern lease. I would target at least 3/16th. 3-years @ $500/acre is decent for Pittsburgh county but not for such a low royalty.
- Having the lease be in force after the primary term is normal if there is production (“held by production”) or certain lease-extending activities like a continuous development clause, however it shouldn’t be open-ended without production in paying quantities. I’d do something like increase the shut-in payment to $25/acre/year and limit it to 2 years. Make sure there’s a clause regarding only having 60 or 90 days to pay the shut-in payment if there is no production (there typically is). Also, these will be gas well, so make sure all the language is at least tied to the gas stream, if not both.
- Make sure you’re not paying post production costs to process the gas (plant fees, pipeline fees, etc). Most of your royalties will be coming from gas with very little liquids, meaning you’ll be mostly paid for methane, ethane, and propane in the gas stream. Plant processing fees could eat away your royalties fast.
- I wouldn’t worry about not having lease renewals included. If in 3 years drilling hasn’t happened, then this lessee probably isn’t the best to get the job done anyway, and someone else will come lease if the prospect is still there. It’ll take care of itself, in other words.
Others can chime in if I missed anything. There are some higher pooling bonuses to the West but the reservoir is much more favorable there. I think 3/16th and $500 could easily be done though.
Tracy made great points.
This is going to sound a little weird, but companies will often take leases based upon an affidavit from heirs but then require a probate before they pay royalties.
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