Oil and Gas Lease for Dummies: 2020 Guide
For over a century, property owners and oil and gas companies have come together to sign mutually beneficial oil and gas leases. Here in the United States, we are fortunate enough to have the capability of entering into an oil and gas lease in order to extract and sell the resources found below the personal property.
Unfortunately, like many property transactions, no two oil and gas leases are the same. Many questions arise before, during, and after gas leases that can only be answered on a case by case basis. With that being said, we’ve put together this ultimate guide in order to help answer some of the most common questions about oil and gas leases.
What is Oil and Gas Lease?
Oil and gas lease is an agreement between a mineral owner (lessor) and a company (lessee) in which the owner grants the company the right to explore, drill and produce oil, gas, and other minerals below the surface of the earth.
We aren’t calling anyone names when we say oil and gas leases for dummies, but rather, we wanted to explain what an oil and gas lease is in the simplest terms, so that anyone with any amount of experience can understand.
Oil and gas leases are created so that a property owner can maintain their mineral rights, while leasing their land to an extraction company.
How Does an Oil and Gas Lease Work?
As a legal agreement between property owners and oil and gas companies, oil and gas leases are fairly straightforward and pretty simple to understand. However, what is incredibly important to understand is that there is no truly standard oil and gas lease.
Instead, oil and gas leases are made up of many common clauses that outline the different defined sections of the document. Although some of these sections may be omitted in simpler agreements, here are the most common parts of an oil and gas lease:
- Dates Clause
- Parties Section
- Consideration Section
- Granting Clause
- Royalty Clause
- Drilling and Delay Rental Clause
- Dry Hole, Cessation, and Continuous Drilling Clause
- Pooling Clause
- Surrender Clause
- Damage Clause
- Assignment Clause
- Force Majeure Clause
- Warrant Clause
For definitions of each of these sections, you can read more about how an oil and gas lease works.
Oil and Gas Royalties: What You Earn with a Mineral Lease
More than anything, oil and gas royalties are the largest point of interest when it comes to signing a mineral lease. After all, oil and gas royalties are a monthly payment to operation stakeholders as a percentage share from the sale of the extracted resource.
In layman’s terms an oil and gas royalty is a paycheck that mineral rights owners receive whenever resources are extracted and sold from their property. In an oil and gas lease agreement, generally, a fixed percentage of the share of profits is defined for the property owner. This percentage is applied to each month’s operational profits, and the landowner is able to earn a monthly income from their oil and gas lease.
Of course, this is a very brief overview about oil and gas royalties. For more information, feel free to read more about oil and gas royalties.
Understanding Oil and Gas Lease Bonus Payments
Beyond oil and gas royalties, the most common way for property owners to financially benefit from an oil and gas lease is with a bonus payment. Oil and gas lease bonus payments are an amount of money that you are to be paid immediately upon signing and oil and gas lease.
Essentially, a bonus payment is designed to entice a landowner into signing an oil and gas lease. It is generally paid 60-90 days after the contract is signed.
Oil and gas lease bonus payments are great, in that they guarantee a landowner is compensated for their time. If no oil or gas is ever extracted from the land, landowners will not be able to receive oil and gas royalties, because nothing was extracted and sold. However, the bonus payment had already been paid, and cannot be revoked. Therefore, a landowner is compensated simply for entering into an agreement, even the operation never begins.
Learn more about oil and gas lease bonus payments.
Paid Up Leases – What Are They & Why are They Used
In order to receive an oil and gas lease bonus payment, landowners may be required to sign a paid up lease agreement. A paid up lease is simply an agreement between a mineral rights owner and an oil and gas company, in which one payment is made at the beginning of the contract.
Although oil and gas royalties may be earned later in the lease’s life, a “paid up lease” is created so that landowners can receive an oil and gas lease bonus payment. Read more about paid up leases in oil and gas.
Pooling, Joint & Unitization in Oil and Gas Leases
What goes on below the surface of the Earth is not always reflective of what is above the ground. In oil reserves, the large pools of crude oil are only rarely located under one parcel of defined land.
For oil reserves that technically belong to multiple mineral rights owners, a few different methods are used to consolidate and fairly compensate the landowners in an oil and gas lease. They are as follows:
- Pooling – Pooling combines several tracts of land together in order to cover the area of a single oil well. In a pooling agreement, all of the parties own their portion of any oil that is produced from within the pooled land.
- Joint – Joint Leases combine two active oil and gas leases into what is known as a “joint operating agreement (JOA). In a JOA, operators agree upon a community lease in which assets are shared and new royalty percentages are defined.
- Unitization – Unitization is a process that merges different pieces of land together across an entire oil field. Unlike pooling, unitization can combine the production of many different oil wells into one shared contact
For expanded definitions and examples of each, learn more about pooling, unitization, and joint oil and gas leases.
An Oil Company Wants to Lease My Land, What Should I Do?
It happens all of the time. A landman has approached you and wants to lease your land in order to extract oil, gas, or other resources that can be sold in the market. Are you getting a good deal or does the man at your door simply want to turn a profit?
Essentially, if an oil company wants to lease your land you have two options: do or don’t. As the mineral rights (subsurface rights) owner of your property, you have the power to control what happens to your land.
On one hand, oil and gas operations can be extremely beneficial as a chance to earn oil and gas royalties as well as any associated bonus payments. On the other hand, you may not want a drilling company in your backyard, or want to reserve your resources for future generations.
Either way, leasing you land to an oil company is an individual choice. On a case by case basis, oil leases should be analyzed, negotiated, and even counter-offered. Always consult an expert before signing an oil and gas lease. For now, you can read more about what to do if an oil company wants to lease your land.
How to Get Oil Companies to Drill On Your Land
Sometimes in this life, you have to go out and get what you want, rather than waiting around for opportunities to knock at your door. If you live in a resource-rich state like Texas, Colorado, Oklahoma, Pennsylvania, or North Dakota (or any other state where valuable resources are found), then you may want to seek out an oil and gas company to drill on your land.
Getting an oil company to drill on your land is actually quite easy. There are many companies and individuals at all levels of the oil industry that would be excited to help in any operation that may be successful.
For first-time mineral rights owners, it is a good idea to speak to experts, lawyers, surveyors, and more before approaching any individual oil company to drill on your land. The more you know about your property (as well as its potential) can be used to leverage your case in an oil and gas lease agreement.
Learn more about how to get oil companies to drill on your land.
Leasing Mineral Rights: Pros and Cons
So you have valuable property, great! Essentially, you have two choices: leasing or selling you mineral rights. Selling your mineral rights results in an outright sale of your land for a large lump sum. Leasing mineral rights is a bit more complicated. For the most part, here are the main pros and cons of leasing mineral rights.
- Retained ownership of mineral rights
- Signing bonuses
- Future oil and gas royalties
- Contracts can be complicated or unfair
- Earnings are highly dependent on found resources and operational efficiency
- Could miss out on opportunity to sell mineral rights
Essentially, leasing mineral rights is a great way to retain the ownership of your property in hopes that a successful drilling operation will lead to a steady stream of oil and gas royalties. Read more about the pros and cons of leasing mineral rights.
Things to Consider Before Signing an Oil and Gas Lease
Once you know that you’ll be making money as soon as the dotted line is signed, then it is tempting to quickly move forward with an oil and gas lease. No matter how good of a deal you think you have on the table, there is always room for a better agreement.
Before you sign an oil and gas lease, patience and attention to detail will maximize the benefits of your oil and gas lease. Here are the top five things we recommend doing before signing an oil and gas lease:
- Ask as many questions as you can, clarify everything
- Be a good person, remain civil and realize that the agreement is designed to benefit both parties
- Know the approximate worth of your land
- Get as much as you can financially
Essentially, you must consider everything before signing an oil and gas lease. Taking the time to fully understand your land and the agreement will maximize the benefits you can receive. Read more about what to do before signing an oil and gas lease.
Oil and Gas Lease Negotiations: Tips from Mineral Rights Experts
Of course, knowing how to negotiate is the best way to sign a mineral lease in your favor. Because there is no standard mineral lease agreement, everything is on the table. Every single aspect of an oil and gas lease can be negotiated, so you will want to come as prepared as possible to fight for what you believe you deserve.
Above all, here are our top three tips for oil and gas lease negotiations:
- Start off by saying “no,” never take the first offer
- Take your time and get multiple quotes
- Talk to an industry expert and have them carefully comb the contract
Once it is signed, an oil and gas lease is legally binding. Therefore, it is critical to only sign when you are absolutely ready. Although some companies may pressure you into agreeing before a set date, you have all of the power to wait until you are ready to sign an oil and gas lease. Read more about oil and gas lease negotiations tips.
Oil and Gas Lease Form 88 – What is it & Where Can I Get It
Whereas there is no standard oil and gas lease, Form 88 is about as standard as it gets in the industry. In fact, for a long time, form 88 was the standard for oil and gas leases. Also known as the printed form, or Producer’s 88, Form 88 refers to the most common page for signing an oil and gas lease.
Form 88 is available online as a template for oil and gas contract agreements. After printing, all that needs to be added is the designated drilling location, involved parties, and specific lease terms.
Even if it seems cut and dry, never sign an agreement of which an oil and gas company refers to as simply a “standard form.” Whereas Form 88 was standard for years, modern oil and gas lease agreements are much more sophisticated than they were 50 years ago. It is likely that your oil and gas lease will have some version of Form 88, so it is important to understand what it is and how it works. Read more about oil and gas lease form 88.