So You Own a Mineral Interest…Now What????

Many people who own mineral interests hope to be approached by a company seeking to lease the interest to explore the area to find oil and natural gas. This is often an exciting time for mineral interest owners. However, it can also be stressful and confusing, because many individuals who hold mineral interests might not understand exactly what the process of leasing their interest entails. This potential lack of understanding may lead to confusion when it comes to negotiating.

So what can you do to limit the confusion and stress? Negotiation always requires knowledge, patience, and a calm mindset. One of the best things that a person can do in negotiating an oil and natural gas lease is to become as familiar as possible with the terms and language involved. Additionally, even though the oil and natural gas industry has not adopted a standard lease form, it is a good idea to become familiar with some of the more common provisions.

Common oil and natural gas lease terms and clauses include:

  • Lessor
    • The mineral interest owner
  • Lessee
    • The company leasing the minerals from the mineral owner
  • Net Mineral Acres (NMA)
    • The number of acres in the property multiplied by the interest in the minerals owned by the lessor.
  • Bonus
    • An amount paid to the lessor as consideration for the execution of the lease. It is generally not included in the lease itself but is paid when the lease is signed by the lessor and delivered to the lessee.
    • Generally based on the amount of net mineral acres owned by the lessor in the property being leased.
  • Royalties
    • There are two types of royalties – net royalty and gross royalty. Both are usually expressed as a fraction or percentage.
      • In a lease where there is a net royalty, post-production deductions will be taken from the royalty.
      • In a lease where there is a gross royalty, no deductions are taken from the royalty.
  • Granting Clause
    • Outlines the purpose of the lease and typically gives the lessee the right to explore, drill, mine, and produce oil, gas, and all other minerals allowed under the lease.
  • Description Clause
    • Describes the property that is being leased. Alternatively, if only oil and gas are being leased, describes the property under which the oil and gas lie.
  • Lease Term
    • The lease term consists of a primary term and a secondary term.
      • The primary term is a fixed term and generally begins at the effective date of the lease.
      • The secondary term starts at the end of the primary term if the lessee has established that certain requirements (such as mineral production) have been met prior to the end of the primary term.
  • Shut-in Clause
    • Allows the company to shut the well so that there is no production, but the lease remains in effect after the primary term has expired.
  • Force Majeure Clause
    • Pauses the running of a lease when events beyond the control of an oil company suspend operations or production.
  • Warrant Title Clause
    • Says that the landowner warrants title to the oil and gas and leased premises. Because the company does its own title check before leasing, the landowner should not warrant title and should strike this provision from the lease prior to signing it.
  • Audit Clause
    • This clause is less common in leases but should be considered. This clause allows a royalty owner to obtain information from the oil and gas company in order to check its royalty statements to confirm the royalties are being paid in accordance with the lease.
  • Indemnification
    • This is another clause that should be considered. Oil and gas companies can cause damage to property and individuals in their operations. An indemnification clause can ensure that the oil and gas company will defend and indemnify the landowner should a claim be brought against them because of the operations and activities of the oil and gas company.

 

Lastly, keep in mind that an oil and gas lease is a contract, and you have the right to negotiate for terms and clauses.

Call us at (580) 234-6600 to discuss your oil and natural gas lease.

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