Oil and Gas Lease
Lease is a well-known term in the world of real estate, but its’ also an important term in the oil and gas industry. An oil and gas lease is essentially the same thing as a lease in real estate, but there are a few differences.
In this article, we’ll explain oil and gas leases for dummies or newbies. We’ll also talk about the mineral lease and what it entails. At the end of it all, you’ll have a much better understanding of how these leases work and who the actors are in them.
Oil and Gas Lease In-Depth Definition
According to the Merriam-Webster dictionary, an oil or gas lease is a deed that authorizes a party to explore for oil and gas by a landowner, typically in exchange for royalties.
The deed involves a lessor and a lessee. The lessor is the landowner or mineral rights owner, and the lessee is typically an oil or gas exploration company.
This kind of lease is commonly called a mineral lease, as the lessee is leasing mineral rights only.
Now, what does that mean? In the US and in many other places, property rights are divided into two: surface rights and mineral rights. This is called ‘split estate.’
In the case of a split estate, the ownership of the land doesn’t guarantee the ownership of everything under it. You may have ownership of both the surface and the depth of the land or one of them.
In oil and gas lease or mineral lease, the party only leases what is below ground, as they are primarily interested in the minerals underneath it.
The lease may last for a particular duration. During this time, the company has the right to dig, explore, and produce minerals (oil and gas). The lessor gets royalties for those minerals in exchange.
The oil and lease terms and definitions may vary based on a number of factors. This also includes whether the mineral rights belong to an individual, a company, or state or federal government.
How Does a Mineral Rights Lease Work?
A mineral lease is not much different from any other real estate lease where you sign an agreement with certain conditions. The lessee, in this case, which is an oil or gas company, cannot begin exploration legally before signing the lease.
In this kind of lease, you, as a lessor, become a partner with the company. In exchange for the minerals they extract, you get royalties, commonly known as mineral royalties or oil and gas royalties. How those royalties are determined will be declared in the lease agreement, but it usually depends on the amount of oil or gas produced.
For the duration of the lease, the mineral rights belong to the lessee. They cannot be sold to another entity. Once the lease duration is up, the ownership reverts back to the lessor. Unless the lessor renewals the lease, the lessee cannot continue to exploit the minerals underneath.
It works similarly if the mineral rights belong to the state or federal government. In this case, the government receives the royalties from the companies they are leasing mineral rights to.
However, the state may not always also own the land above those minerals. This makes things a little bit more complicated for the lessee. This means that they will also need to buy or lease the land to be able to access the minerals they have leased from the state.
The state may or may not even inform the landowners that they are leasing mineral rights to another entity underneath their land.
How Long Does a Mineral Lease Last?
The term of the mineral lease for oil and gas is typically divided into two: primary term and secondary term. The primary terms can be as short as one year and as long as 10 years.
The secondary term only begins when the conditions for the primary term have been met and continue to be met. In many cases, the secondary term extends to as long as there is oil and gas to produce.
What this means is that at times, these leases can last generations as minerals continue to be produced until the well gets dry.
So it’s also important to take into account the term of the lease when deciding on the mineral rights lease rate or, in simpler words, royalties.
You may also want to include your heirs in the lease, especially if the term is long enough to last beyond your lifetime.
Things to Consider
A mineral lease (oil and gas lease) is a complex agreement that includes a lot of technical terms and clauses that may not make sense to the layman. This is why it’s important to utilize lawyers and firms that deal with oil and gas leases and royalties to represent your interests as a lessor.
For instance, while you may think that you are only leasing mineral rights and that companies will only dig, you may fail to realize that the lease may also cover a lot of surface use.
The company might need to lay down pipes for transferring the minerals. Similarly, they may also need to erect other infrastructure on the surface to facilitate mineral production.
In essence, you’re only leasing your mineral rights, but then they are also using the land. Establishing what rights the lessee has and to what extent is important. It is because your mineral rights lease rates should be commensurate with the extent of the rights.
The oil and gas lease terms and definitions can be overwhelming. Expecially for an individual not directly involved in the oil and gas industry.
Therefore, it’s very important that you read the lease thoroughly and understand it before signing it.
In conclusion, oil and gas lease is also called a mineral lease. It grants oil and gas companies the right to explore and produce oil or gas. The mineral owners receive royalties which ultimately depend on a number of things.
Such a lease can last for decades and pay royalties monthly, quarterly, or annually. The lease may even pass down generations, with the lessor’s heirs receiving the royalties after their passing.