Are you a mineral rights owner? For sure, few moments are more exciting than the day that you sign a new oil and gas lease agreement. With the right operator, your mineral rights can earn long-term oil-gas royalties. This is from a successful exploration, drilling, and sales operation. So what happens when things don’t go as planned?
Thankfully, there are many oil & gas lease provisions that protect mineral rights owners and allow for them to plan for compensation, even in the event of an unsuccessful oil-gas lease. In this helpful guide, we will go into full detail about rentals and delay rental provisions to these leases. With this, we hope to help define these terms. We will showcase why they are important for mineral rights owners in the United States.
Oil and Gas Leasing
Before we begin, it is important to understand the basic structure of a mineral rights lease. This is in order to see the value of these lease provisions. Mineral rights entitle owners to the subsurface of a particular plot of land. This can be very valuable if holding property that contains crude oil, natural gas, coal, or other valuable resources.
In an oil and gas lease, a mineral rights operator (typically a large company) temporarily leases your mineral rights. With that that they can properly explore, extract, and sell the minerals. As compensation, you will then earn lease payments for oil and gas. This is as a direct percentage of the operations proceeds and profits.
Oil and Gas Lease Payments
Lease payments for oil and gas are made by operators to mineral rights owners. This will keep a lease valid. Take note though that this depends on how the provisions are laid out in the lease agreement. Rental payments may be made monthly, quarterly, biannually, or annually. It will keep the property owner compensated during periods in which production is absent or less than expected.
Lease Payments vs. Shut-in Royalties
Are you familiar with oil and gas glossary terms? Then you may be wondering if there is a difference between lease payments and shut-in royalties. The two are very similar and often paid at the same time. On the other hand, they actually do represent two entirely different lease provisions and transactions.
Here, the key difference to understand between rental payments and shut-in royalties is the terms of the lease. Shut-in wells often happen when unexpected problems or considerations arise. This is usually when there are still plans to operate the well in the future.
Lease payments, on the other hand, are paid when there is an indefinite shutdown of a well. Full shutdowns represent an end to profits and well production. However, lease payments help ensure that mineral rights owners receive payment for their participation in the oil and gas lease.
Delay Rental Payments For Oil and Gas
Delay rental payments are similar to ordinary oil and gas rental payments, only differing by definition, timeline, and compensation. These rental payments for oil and gas are typically made annually. Done with the date occurring on the same date each year after the validation of a mineral rights contract.
Paid from the lessee to a lessor, delay rental payments represent easy and just compensation for oil and gas owners who have entered into an unfortunately non-producing agreement. If dealy rentals are not paid, the contract is often considered abandoned, which opens the doors for the owners to explore new oil & gas leases terms with other operators.
Delay Rental Clause
The drilling-delay rental clause is added to oil & gas leases provisions to protect both the mineral rights owner as well as the oil and gas operator. Delays may happen for both expected and unexpected reasons. However, rental and delay rental payments are to ensure that the original lease agreement can be applicable.
Without rental payments, mineral rights owners would be more inclined to find a better oil and gas operator. Usually those with more favorable lease terms and production timelines. With the delay rental clause, oil and gas operators have no requirement to drill. Usually during the primary terms of a lease with permission to operate along with their own, reasonable timelines.
What is the “Unless Clause?”
Unless clauses are put into place in oil & gas lease provisions to allow for the automatic termination of a non-honored lease. What happens if operators fail to pay proper rental or delay rental compensation? Then oil and gas owners have the permission to use the terms outlined in the clause to automatically terminate the lease. This was usually effective immediately. Here, unless clauses are a critical part of any lease agreement.
If you have further inquiries or questions about the oil and gas leases, feel free to reach out to us here.