Leasing Your Property

WHAT TO DO IF YOU ARE APPROACHED TO LEASE YOUR MINERALS THROUGH AN OIL AND GAS LEASE (OGL):

NEGOTIATE ADDITIONAL MINERAL OWNER LEASE TERMS-Several of the below are universally acceptable to Lessees, regardless of what they send you to begin with.

First thing, always ask how many net mineral acres you are talking about. All leases should be negotiated using the following guidelines, but you need to know how big the deal is before you begin. For e.g., for half a net mineral acre, you might not care about the bonus as much as trying to get a higher royalty rate. Their first offer will probably be in the form of a “Producer’s 88,” or a standard plain lease that needs a few adjustments for your protection and in ways that most companies accept.

Tell every landman that calls right off that you will be easy to work with and you will lease to them the acreage they want, but it is going to be a “pro” type lease with a quarter royalty, competitive bonus, no kicker, no title warranty, and you need some kind of continuous development clause. If you read that sentence to them, you cannot go wrong. Ask them to send you a proposed lease with the above terms included.

What this means:

You all know what the royalty rate is and probably the bonus, but just in case, the bonus is the per net mineral acre payment the company leasing you will pay you for signing the oil and gas lease (again, let’s call it the OGL). Generally, the “primary” term of a lease is the time the company has to start drilling. A “kicker” is an option you grant the company to extend the lease (usually two more years) for an additional bonus payment beyond that original term. I do not like these because the bonus rate for the extension, the kicker, is exactly what the original payment was, and I do not like the idea of negotiating the kicker bonus when you do not know what lease bonus rates will be three years from now (or whatever your primary term ends up being). Of course, I have outsmarted myself by refusing kickers before when the bonuses go down over the primary term, and since I do want a well drilled on my minerals, I sign a new two year lease at a rate lower than I originally received! Ooops.

Bonus-(amount per acre you are paid to sign the lease). Assuming they make you an offer and your co-owners, neighbors, or friends cannot shed any light on the going rate where ever the property is, then make it clear to the landman that you will lease on the basis of the “Most Favored Nation” clause, i.e., you should get the same price as the highest price paid to other mineral owners in the lease, or section, or field, or however broad you can get. Language like this: “If another landowner within the geographic area (e.g., within a 5-mile radius) is offered and paid a higher net mineral bonus amount per acre by Lessor’s Lessee, the Lessee will pay the Lessor the difference between the bonus amount, which would have been paid at the higher per-net mineral acre bonus amount and the bonus amount paid.” Tell them you will take the highest bonus rate “paid or promised” in the interim. Be sure and follow up and ask if anybody else got a higher bonus rate.

Royalty-One Quarter is the going rate almost everywhere for “pros.” With some exceptions, depending on location and current activity.

Term-Again, this is the period of time in which they have to begin drilling a well, very commonly three years. This is your primary term.

No warranty-You do not have a title opinion, how can you warrant title? Strike this paragraph or the part where you warrant. They may ask for a Special Warranty, and this is okay only where you do a “by, through, and under” warranty, meaning you have not impinged on the title of the tract while you owned the property. Typically you can simply insert that phrase to the end of their warranty clause: “, by through, and under, but not otherwise.”

Free type lease-Most lease forms used by oil companies provide that royalties are to be based on the "proceeds" or "revenue" received by the Lessee, "computed at the mouth of the well." Texas courts have construed this language to mean that companies can deduct post-production costs from Lessor's royalty, because those costs are incurred beyond the "mouth of the well" – that is, after the oil or gas is produced. If the company's lease form is used, this provision must be changed to avoid post-production-cost charges to the royalty owner. Historically, the working interest ownersIn order to change this allocation of costs the lease must provide that royalties should be based on the value or proceeds calculated at the point of sale. Just insert those five words where necessary, if possible replacing the words at the mouth of the well, which has been held to mean you pay your share of costs.

Continuous Development: Horizontal and vertical severance is ideal. Usually it works to tell them to propose some language that works for them and fits with their Pooling Language. The State promulgate an amount of acreage necessary to from a “pro ration” unit of acreage for each well. The idea is to get lands released after the primary term or its extension through operations that are not contributing to a pro ration unit so that you can re-lease them to a party that will develop. Usually be willing to accept their language.

Pooling Language: Most companies insist on Pooling language necessary for horizontal wells. Pooling allows them to combine your tract with other tracts in order to get enough acreage to drill a well. You can usually use their language, but read carefully so that it does not contradict CD above.

Memorandum: Some companies will have you sign a Memorandum as well, which I despise because the lease itself will not be of record which makes it hard for people down the road to know if your minerals are open or not. If they insist on using one, make sure you ask for a copy of the recorded Memorandum and attach it to a signed copy of the lease it supports.

Shut In Royalty Payments

Under NO circumstances should you sign a lease where the operator has the right to maintain the lease beyond the primary terms with SHUT IN ROYALTY PAYMENTS. Just stay no.

If you counter the Lessee’s offer sent after the first conversation, you can use editing insertion marks to put in your language and draw a line through anything you want to strike. Once you get a deal you like and sign and return the OGL, initial all changes to the lease form. Also, ask them to send you a recorded copy once they get it back from recordation in whatever county the property is located.

INJECTIONS. Lessee may not inject any substance into the subsurface of the Leased Premises without Lessor’s prior written consent, including injections related to gas lift operations or recycled gas. This is a new term that could be very important in case someone starts putting CO2 or water in your minerals. CO2 can by used for flooding and enhancing production, and that is one thing, but it is also a by product of hydrogen creation and might have to be sequestered. You want to get paid for this sequestration. Very important long term. I do not have this in any or many of my leases because such a thing was not contemplated. IN SOME STATES, THE SURFACE OWNER MAY CONTROL THE OWNERSHIP OR REVENUE FROM INJECTION OF SUBSTANCES.