How Does an Oil and Gas Lease Work?
An oil, gas, or mineral lease can be defined as 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.
The dates clause establishes the date, time, and primary term of the lease. This is included in every mineral lease.
The parties section lists the names of all persons bound to the lease.
Here, the legal terms of the lease are outlined and made enforceable to all parties the lease pertains to.
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.
The royalty clause is very important to the lessor, or the mineral rights owner. Here, the percentage of the proceeds of extraction are outlined for the amount and means of payment.
Drilling and Delay Rental Clause
This clause is included to allow the lessee to defer the immediate use of the property. Delay rental fees are also defined 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.
This clause allows for the lessee to pool together multiple lesses in order to form one larger drilling operation.
Here, the rights to surrender the lease are defined for the lessee.
Liabilities of the Lessee are outlined in the damage clause if any significant damage is made to the property.
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 is protected from nonperformance declared in the lease by state and national laws.
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.