I periodically see posts making reference to a primary term with a lease extension right.
Sometimes this is shown as a 3+2 which means a three year primary with an option to extend for further 2 years.
This extension option appears to me to be a benefit for the Lessee and not necessarily for the Lessor. It creates a ceiling and in the event that "market" has decreased the extension option will not likely not be exercised. Conversely if the "market" has strenghtened, the option will be exercised and the prospect will be flipped to another operator creating wealth accumulation for the propsector while leaving the mineral owner receiving something less than current market.
Most offers I have recieved are presented with tremendous excitement. I am usually told that most other mineral owners have leased, all are getting the same or none are getting more, that the company will be drilling almost immediately, etc.
Why is there a need for control of up to 5 years and how could that possibly be in the best interest of the Lessor?
Dear Mr. Archer,
Marketing ... that's what the tremendous excitement is about! Successful marketeers, i.e. successful landmen, effect successful signings of onerous leases. How else can an unknowingly vague landowner be excited and coerced into signing as piece of paper that promises to "plunder" his land in return for pennies and royalty that may never come? And for five years?
To direct to the last half of your last question ... personally, I do not believe that any O&G lease is in the best interest of the Lessor, unless it's Lessor onerous.
Thank you.
Pat
If you sign the company’s lease, you are probably being taken advantage of. There are lots of capable, skilled oil and gas lawyers out there. Find one. He will craft a lease that will protect your interest. Money spent on lawyers sometimes is well worth it.
Right now, the price of the product is so low, I cannot see anyone signing a lease.
My post was an effort to educate the members on this board and to encourage them to think about what they are being asked to sign.
I would never sign a lease giving an option as that is clearly to no advantage to me.
This is not different than an option with a national retail tenant in a shopping center. they are happy to have the option but it will be only exercised when the market rate is in excess of the option ceiling. However if market rates are below the option, you can rest assured that they will renegotiate to "market."
certainly many of the leases are negotiated by promoters or flippers and the spread is pocketed for living expenses. Not a bad deal, for them.
I often hear of the benefits of engaging counsel. However, for those of you who have a 1/128 of a five acre tract that is going to be included in a gas well, learn fast what works.
Good luck to all.
Extensions are for the benefit of the Lessee, not the Lessor's! If a lease is located in a "hot area" and at the end of the primary term the option term is for say a $1,000/net. mineral acre and the lease bonus being payed in the immediate area is $2,000 per net. mineral acre they most likely WILL pay the $1,000 per acre and they get a real bargain.
If oil falls like it has now they may not exercise the option or they may come back and offer another 3 year lease with another 2 year option at say $400 per acre. This is what is happening now in East Texas in our area!