How Does an Oil and Gas Lease Work?

An oil, gas, or mineral lease is a legally binding agreement between the mineral rights owner and the company bringing the oil, gas, or mineral reserves to the market.  Agreements between landowners and oil companies date back to before 1900, though the process is still generally the same.  Knowing the details of an oil and gas lease is crucial before agreeing to anything that is legally binding.

What does a Standard Oil and Gas Lease Look Like?

Although this is a valid question, unfortunately when it comes to mineral leases:  there is no standard. Instead, they are made up of different clauses and sections.  Here are the parts of an oil and gas lease that are most common.

Dates Clause

The dates clause establishes the date, time, and primary term of the lease.  This is included in every mineral lease.

Parties Section

The parties section lists the names of all persons bound to the lease.

Consideration Section

Here, the legal terms of the lease are outlined and made enforceable to all parties the lease pertains to.

Granting Clause

The granting clause defines the property and purpose of the lease.  It then goes on to grant the use of the property to the lessee.

Royalty Clause

The royalty clause is very important to the lessor, or the mineral rights owner.  Here, the percentage of the proceeds of extraction is outlined for the amount and means of payment.

Drilling and Delay Rental Clause

This clause will allow the lessee to defer the immediate use of the property.  Delay rental fees are also under definition here.

Dry Hole, Cessation, and Continuous Drilling Clause

If the land is not found to contain minerals (aka a “dry hole”), this clause grants the lessee power to cease production.

Pooling Clause

This clause allows for the lessee to pool together multiple losses in order to form one larger drilling operation.

Surrender Clause

Here, the rights to surrender the lease are in definition for the lessee.

Damage Clause

Liabilities of the Lessee are in detail in the damage clause if any significant damage is present to the property.

Assignment Clause

The assignment clause protects both sides of the lease so that either party can transfer the rights or ownership of the property with the outlined notice.

Force Majeure Clause

In this clause, the lessee has protection from nonperformance in the declaration that the lease is by state and national laws.

Warranty Clause

The warranty Clause is important, as it guarantees rights to the land to the lessee if the lessor happens to default on mortgages, taxes, or other obligations causing them to forfeit their ownership.