For many decades, landowners and oil gas companies have come together to sign binding agreements on oil and gas leases. Over the century, the oil and gas industry has grown tenfold across America, and drilling and production continue to increase. Oil and gas exploration has a significant economic implication for landowners. But, money is not the only issue at stake when one is preparing a lease. A good lease should be about maximizing financial gains and safeguarding the land resource and usability. As a landowner, you should understand that no two oil and gas leases are the same. Several questions arise prior, during, and after gas leases and need to be answered on a case-by-case basis. With this said, we’ve prepared the ultimate checklist to answer some of the queries about oil and gas leases.
1. Ask Questions
In many cases, the landman reaching out to you may not share all development details or information about the operator’s plans. As this Time Of Start Ups Interview points out, ensure you use these lease discussions to acquire as much information about your mineral estate as possible. Some questions – if well answered – will pay dividends over time when managing your minerals. These questions include but not limited to: are you drilling vertically or horizontally? Who will be operating this well? Do you require surface locations? The answers to these questions should be organized and saved on a track-by-track basis. This helps you begin making out comprehensive files for each interest you own.
2. Avoid Settling for Net Royalties
All royalties aren’t created equal. It would be perfect if you understood that an increase in the royalty percentage you’re paid is only half the battle. The critical issue when negotiating royalties is whether the royalty is paid on net proceeds or gross proceeds. Ideally, this is drawn from the sale of gas, oil, hydrocarbons, and other related products extracted from your property. The net royalty allows the oil and gas company to deduct any post-production costs from your royalty payment. These deductions are sometimes large and can lower the royalty payment by 50 percent or more.
3. The Art of Negotiation
It would be perfect if you understood that everything in an oil and gas lease is negotiable. Additionally, the offering party will never open with their top offer. In many cases, there will be some negotiations along the way before a deal is eventually struck. If a landman contacts you and makes an offer to lease your minerals, don’t be offended if it sounds low. You can always, in a respectful manner, decline and counter the offer right away. In this way, you won’t have to deal with pressure and stress related to this matter.
4. Duration of Lease
The length of the lease varies with different regions. Some states have a standard duration of lease that is sometimes called a “five plus five.” This means it’s a five-year lease with an option to extend it for five more years. This means if you sign the lease, the company has five years to get your minerals developed. If they fail to have it drilled and developed within the five-year duration, they have to pay you again. This is also coupled with a bonus consideration to extend the lease for another five years.
In the oil and gas business, knowledge is money. In some cases, the leasing portion of your mineral management might be temporarily complete. However, staying updated will prepare you for what’s to come. Finally, once an oil and gas lease is signed, the company will be issuing all payments to the entity or name listed on the lease. This means you will need to transfer mineral ownership into a new entity before signing a new lease.