My siblings and I are expecting a lease proposal soon. We’re new to this having inherited the mineral rights recently. What are the negotiating points that we should focus on?
Where are the mineral rights located?
Generally the things that are negotiated involve the term (duration) of the lease, the royalty, and the lease bonus payment (the amount paid to keep the lease in force throughout the term). Rental leases with annual payments used to be more common, but with the development of the paid-up lease, most mineral owners and Operators prefer to have it paid-up and not have to worry about another payment being due until it is extended, renewed, or goes into paying royalties.
They’re in Wetzel, Tyler and 2 other counties in WV.
As Ryan said, there may be a tradeoff between Upfront Bonus and Royalty Percentage. If the well(s) are successful, you will probably be better off going for the higher royalty and lower bonus.
I wouldn’t agree to a Primary Term longer than 5 years, with a 5 year extension option with another bonus.
Another item to look at would be the post-production deductions, particularly as it pertains to gas production. That can make a significant difference.
If you have a large acreage position, you might also consider a Pugh Clause. If your position is small, it won’t matter.
If you have a significant acreage position, I would seriously encourage you to get some professional help in negotiating your lease.
4 Likes
What do you consider a significant acreage position?
@UncleJed , you have some solid advise on here already but I work in this area and may be able to shine some area specific insight on this. You said tyler and wetzel, so I’m going to assume its near the county line perhaps? This likely puts you in Antero territory. Be VERY thorough signing a lease with them! They are a big group and know the ins and outs of a lease to maximize their profits (as any company would I suppose). The negotiating points of a lease is just as much about removing certain things as it is about adding some in. For this area they typically offer a 12.5% lease with 12.5% deductions. If you can, avoid this by any means necessary. Tyler/Wetzel produce decently and any deductions will be very costly in the long term. I’ve seen them also exclude certain minerals from their royalty payments. For example it stated that royalties would be paid on all oil and gas, but not gaseous liquids which are NGL’s and these are very profitable. You need to make sure 100% that you get royalties on every single thing coming from that ground.
I think the higher end of a lease in those areas is about 18%, ask for 20 percent anyway but be prepared to accept lower. 15% is about as low as I would go unless the area is already held by production and you are stuck with a lower amount regardless of what you do.
Lease bonuses and royalty payments typically are inversely correlated so the higher the bonus up front, the lower the royalty percent. I’ve seen recent leases with $3,000/ net mineral acre signing bonus on 12.5% leases. Ask for $5,000/ net mineral acre and 20% royalty without deductions. You will most definitely not get both of those, but they start low, why not you start high? I would feel like I won if I walked away with $3,000 per acre bonus and 15% without deductions but $2,000 and 18% is also a great option. Either way, don’t sign for deductions, and don’t sign if you aren’t being paid on all of the minerals being extracted.
This is a less known fact, but you can just refuse to sign or give in. You’re most likely already in a forced pooling area that they have permitted to drill. They HAVE to pay you when drilling happens, which it will with or without your lease. If you did not sign a lease though WV mandates that they pay you the same as the highest lease within that unit which may indeed be $5,000 at 18% but it’s not the favorable way to go, and getting on their payment books after the fact is a headache versus going into it with a signed lease.
The more land you own, the more leverage you have. How many acres are you working with in these counties? The negotiating power changes if you have 0.4, 4, or 40 acres so be mindful of not strong arming them when you don’t have the cards. They know what they are working with and I’ve seen them just stop communicating with mineral owners entirely and you won’t get a call back at all to make an agreement if you aren’t reasonable and professional too.
Thank you, that’s some really good information! My Aunt and Uncle have already signed their lease agreements. My Dad was the oldest and I believe 3 wells have already been started. The rights are on 252 acres in Tyler, Wetzel, Pleasants, and Jackson.
Antero is the main company, but EQT is also dealing with us on some of the land.