Oil and Gas Lease offer

Oil and Gas Leasing Help
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Hi. My sister and I have been offered a new Oil and Gas Lease on our share of property in the Bakken area of North Dakota. The offer is $300 bonus per acre, 3/16ths royalty and a three year lease, the terms of which I asked. I refused to do a two year option and they agreed to this. Our current lease expires in January 2010. The old lease and the new lease offered is the standard Producers 88 lease, but we have an Addendum added to it. We do have a Pugh clause in the old lease but I notice it doesn’t have “vertical and/or horizontal” mentioned in it. Does anyone have the teminology for adding this? Also, I don’t understand the terminology … “or force release of uphole or downhole of zones that are producing”. If you have any other suggestions on provisions we should add, it would be appreciated.

I don’t know what a “no surface use clause” is. Would love that explained to me.

Thanks so much.

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Carol -

Chase’s reply is a good answer to your questions. Normally a vertical Pugh clause forces an operator to let go of all of the underground minerals other than the rock zones producing when the primary term expires. The language usually says something like “all formations below the total depth of the well and 100 ft above the uppermost perforation”. That allows you to lease again the rights to other parts of the subsurface minerals.

If you are in the heart of the Bakken play, then the offer is very low. I’d certainly ask for at least $500-1000/acre and 25% royalty in the best parts of the trend. Although many mineral owners focus on the bonus, it is the royalty percent that delivers the real income. Always ask for more than what’s offered, but encourage operators to drill a well, In my mind that’s low bonus, short terms, high royalty.

If all mineral owners prevented surface use then no wells will get drilled and no oil and gas income will ever be received. Again, you want to encourage drilling activity, not impede it. Surface use is not all that bad. Make sure there’s strong language about maintenance and restoration.

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What county are you in?

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McKenzie

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Royalty percentage and lease bonuses vary considerably across the country and there is no “standard” other than it normally being a minimum of 12.5%. In a very active area with great drilling success and profitable reservoirs, lease bonuses have been greater than $25,000/acre with 25%. Other relatively inactive areas might bring $25/acre and 12.5% with long terms. Leasing terms are driven by competition and prospect viability. Your trade seems like a good one.

Some states allow deduction of transportation, processing and marketing costs to royalty owners, other states do not. Even in states where they are allowed, a lease can be negotiated that prohibits them. These costs can be considerable and difficult to understand and audit so it is best to exclude them where possible.

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Dear Ms. Pattee,

A “no surface use” provision is exactly what it says. The clause is generally drafted that the Lessee has no right to enter the property for the purposes of exploration, but can pool or unitize the minerals covered by the lease with other lands, or to drill under the property as long as the surface is not disturbed.

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Thanks. We have signed a lease after having an N.D. attorney look it over and hopefully we are protected.

Buddy Cotten said:

Dear Ms. Pattee,

A “no surface use” provision is exactly what it says. The clause is generally drafted that the Lessee has no right to enter the property for the purposes of exploration, but can pool or unitize the minerals covered by the lease with other lands, or to drill under the property as long as the surface is not disturbed.

Buddy Cotten
www.cottenoilproperties.com

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Thanks. Appreciate it. Carol

Carol Pattee said:

Thanks. We have signed a lease after having an N.D. attorney look it over and hopefully we are protected.

Buddy Cotten said:
Dear Ms. Pattee,

A “no surface use” provision is exactly what it says. The clause is generally drafted that the Lessee has no right to enter the property for the purposes of exploration, but can pool or unitize the minerals covered by the lease with other lands, or to drill under the property as long as the surface is not disturbed.

Buddy Cotten
www.cottenoilproperties.com

9

Debra Ganske said:

Thank you for your reply. I was the spokesperson for the family. I gathered the information, kept the family informed, and my family trusted my judgment. It can be stressful negotiating for a lease knowing that your family members are counting on you to obtain a “good” lease and to protect their interests. Doubt inevitably creeps in concerning the decision-making process, but we fall back on the concept that we have everything to gain and nothing to lose (because the minerals were just sitting there, unproductive, and not making any of any money). At least now there’s a possibility that we will realize a financial benefit. It was important to us that our royalty be cost-free.

Gary Swindell said:
Royalty percentage and lease bonuses vary considerably across the country and there is no “standard” other than it normally being a minimum of 12.5%. In a very active area with great drilling success and profitable reservoirs, lease bonuses have been greater than $25,000/acre with 25%. Other relatively inactive areas might bring $25/acre and 12.5% with long terms. Leasing terms are driven by competition and prospect viability. Your trade seems like a good one.

Some states allow deduction of transportation, processing and marketing costs to royalty owners, other states do not. Even in states where they are allowed, a lease can be negotiated that prohibits them. These costs can be considerable and difficult to understand and audit so it is best to exclude them where possible.