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You should consult with a licensed attorney specializing in oil and gas law in your jurisdiction, a qualified financial advisor, or other appropriate professionals before making any decisions based on this material. Neither the author nor the publisher assumes any liability for actions taken in reliance upon the information contained herein.
If you own the resources below your property’s surface, then you may be inclined to monetize your asset. With mineral rights, the two most common ways for people to turn their property into a paycheck are selling or leasing mineral rights. In this article, we are going to highlight the advantages and disadvantages of oil and gas lease agreements.
Pros of Leasing Mineral Rights
Oil and gas companies often approach property owners with a contract in hopes to “lease” the land’s mineral rights. If you sign on the bottom line, there are a few great benefits.
Retaining Ownership of your Mineral Rights
In leasing mineral rights, the mineral rights holder is still technically the property owner, as the oil and gas company is essentially renting it. Once the lease expires, everything will go back to normal or the contract can be renewed.
Potential Cash Flow Opportunity with Mineral Rights Royalties
Whenever an oil and gas company is able to extract and sell oil or gas from your property, then you will earn a percentage share of that sale. The amount that you will receive is based on the current price of the resource as well as the percentage ownership as defined in your contract.
Signing Bonuses
Additionally, you may not have to wait until the drillers strike oil to put some money in your pockets. Many oil and gas leases include a signing bonus for the property owner to enjoy immediately.
Cons of Leasing Mineral Rights
Of course, there are also some downsides to leasing mineral rights. Choosing to lease, rather than sell your mineral rights comes with a few potentially costly consequences.
Highly Variable Payouts
Sometimes, you may not find any oil or gas on your property. Other times, the company slated to drill on your land may go bankrupt or simply lose interest in the project. All too often, oil and gas leases become dormant and property owners are unable to reap the benefits.
May Miss Out on Opportunity to Sell Mineral Rights
On the other hand, an extended oil and gas lease may deplete the resources below your property entirely. Depending on the terms of your lease agreement, this may turn out to be a lesser opportunity than outright selling your mineral rights. If you extract all of the oil or gas from your property under a bad mineral rights lease, then you may be missing out on earning a potentially large lump sum from selling your property.
Entering Into a Complicated Agreement
Lastly, leasing mineral rights is complicated. They are not required to be made public record and no two are alike. Whereas the sale of mineral rights is a bit more black and white, leasing mineral rights can be extremely complicated. It is always best to consult a professional before leasing your mineral rights.
