Lease to First Royalty Check

More often than not, first generation mineral owners aren’t aware of the processes that fills the gap from the time an Oil and Gas Lease Agreement is signed to receiving that promising first royalty check. Little do first time interest owners know, they may not be receiving a check for a significant period of time based on how they handled the leasing process. In order to reasonably estimate when that first check will arrive in the mailbox, interest owners need to become aware of certain and specific processes that happen when considering, negotiating, and signing a Lease. Here are some things to consider:

When signing a Lease, you are giving the Lessee (or whoever they may assign it to) the exclusive right to explore for and develop your oil and gas for a set period of time, called the “primary term”. Currently, in “active” or “producing” areas the primary term is typically a period of three to five years, though terms can be for as little as six months in some instances. In general, if a Lessee drills a producing well during the primary term, their Lease rights are extended past the primary term into what’s called the “secondary” term. For example, “as long thereafter as there is production in paying quantities from the leased premises.”(Note: The requirements needed to enter into the secondary term are different depending on which state the property is located and the specific lease language, if any applies). This “Habendum clause”, (the term clause) stating how long the lease will be in force, is usually stated near the top of the lease itself. Once production is established, which can be anywhere from three to six months after the well is spud (commencement of operations), the first royalty checks will begin to come in. If, for some reason, a well is “held in suspense” in the early stages of production, the royalty check may be delayed but will still carry forward revenue for the months produced. Because of this, your first royalty check may be a larger amount compared to the monthly or cyclical checks that the interest owner will continue to receive later on. That being said, it’s important to know the language of the Lease Agreement and the allowed time the Lessee has to drill a producing well. When negotiating terms and bonuses with a Landman, be sure to fully understand the lingo used in the negotiation and, if necessary, hire personnel that are familiar with lease terms such as legal counsel; Keep in mind, Landmen always have their company’s best interest in mind when negotiating Leases. However; if the Lessee does not, or is not, able to drill a producing well during the primary term and there was not an “option to extend” agreement within the Lease, then the Lease will expire at the end of the primary term, after which point you’d be free to Lease to someone else if the opportunity arises. There are multiple variables with every Lease such as acreage size, royalty rates, and commodity prices and not to mention, no two Leases are the same. Ultimately, the easiest way to find out when you might receive your first royalty check is to learn as much as you can about who you are leasing your minerals to, how long until expected production, and most importantly, the terms you are agreeing to. Once you can provide yourself with the answers to these questions, you can reasonably calculate the arrival of your first check.

Have had a signed lease with Rosetta Resources for one year in Reeves County, Texas, Block C6, no royalties received as of this date. Heard that Rosetta sold out to Noble Energy. Anyone have any late information?

Good read! Our family recently found out they own mineral rights in Monroe County, Ohio. They were presented with a lease, and I told them do NOT sign until we find out more. Two of the three mineral owners in the family signed. What now for the hold out? Can they negotiate a better deal? I have heard bonuses are going for 5-10X the offer, and royalties 5-10% higher. Also they hid that little catch that the expenses will be deducted from they royalties in the lease papers.

I know landmen, and oil & gas reps hang out on these forums so please no one attempt a deceptive response. I am not an easily fooled.