Oil and Gas Leasing Tips and Oil CompanyTricks

An oil and gas company may present a lease as a simple deal. They’re betting you don’t know what you’re leaving on the table. ERGF aims to empower mineral owners to negotiate to their own advantage. Below are our tips, and their tricks, so you can make a better deal.

The Basics

  • The Trick: The landman may give you a 2 or 3 page lease. All the terms will be very favorable to them.

    Our Tip: It’s all negotiable. There is a reason the State of Texas lease form is 11 pages. That is 8 or 9 more pages of protections for the State’s interest that the oil company isn’t going to volunteer.

    Our Tips will give you some idea of things to ask for. If your means allow, consult an attorney who can prepare an appropriate form for you.

  • The Trick: Flippers and speculators are rampant. Is the person trying to lease you actually a driller? Or are they just hoping to re-sell the lease later?

    Our Tip: Just because somebody has the best price terms doesn’t make them the best person to sign with. If they are just flipping or speculating, they could get stuck with a lease they can’t sell and won’t get drilled.

    An established, respected investor in oil and gas wells (a “non-operating working interest owner”) often can provide a great deal to you. They hope to invest and participate in the oil well. But not every oil company wants to share and could refuse to let the investor join. It could hurt the value of your interest, so careful research is necessary before signing with an investor.

  • The Trick: The oil company may want a 5 year initial term. Or 3 years with a paid option to extend another 2 years. That is 5 years that your interest could possibly be tied up with no requirement to drill.

    Our Tip: 3 years is reasonable and customary. Somtimes even less, depending on surrounding activity and competition. A paid, 2-year option is sometimes reasonable, if the payment is competitive.

  • The Trick: The oil company may offer a high bonus and low royalty, or low bonus with high royalty. Sometimes, they may offer no bonus payment at all.

    Our Tip: Reasonableness of the bonus payment varies widely based on where the minerals are located. In some areas, it could be $200/acre, and in some areas $5,000. Ask around. Go online and ask what others are getting in the area.

    In an unproved area, a low bonus payment may be the best offer there is. And often, it is worth taking a lower bonus payment if it will give a higher royalty.

  • The Trick: Anythign below 25% might be a trick. The oil and gas company is going to expect at least 75% on their end, and anything more is a huge win for them. And often, flippers and speculators will try to have you sign for a 20% bonus. Their goal is to sell the lease to the oil company and keep an additional 5% for themselves. The oil company still gets their 75%, but that is 5% that the fipper gets that should be yours.

    Our Tip: Insist on 25% everytime. Even in unproved, speculative areas, 25% is on the table, though it could mean a lower bonus payment. But more often than not, the higher bonus will be worth far more than the lower bonus payment.

Intermediate Terms

  • Their Trick: The oil company will give you a lease form that describes oil, gas “and other minerals”. These “other minerals” could potentially be very valuable.

    Our Tip: Your lease should be limited to oil and gas hydrocarbons only. If they want hard minerals such as sulphur or rare earth minerals such as lithium, additional terms should address the value of these minerals.

  • Their Trick: A very basic royalty provision allowing the oil company a lot of flexibility on where they can sell your minerals and what costs they can deduct.

    Our Tip: Royalty calculation formulas can get very complex. If you have a large interest, it is worth consulting an oil and gas attorney familiar with the area. At the very lease, a “cost-free” royalty should be included, but there are still variations on this.

  • Their Trick: The oil company will try to include language describing the land where your minerals lie, but also all lands “adjcant or contiguous” with your lands, whether or not described.

    Our Tip: This is one of the more egregious abuses of an oil company. Attempting to capture your mineals in other lands that happen to lie next to the lands they are trying to lease is tantamount to theft. In irregularly shaped tracts, there is reasonable basis to allow for inclusion of very small strips of lands that may be difficult to describe. But, the oil company should do their homework beforehand and figure this out first.

  • Shut-in royalty payments are common in a lease, and give the oil company some extra time when an otherwise capable well needs a pipeline connection or market.

    Their Trick: Historically reserved for gas wells, where product must be pipelined, oil companies often want to extend this to oil wells, even though the product can easily be trucked. They will also try to extend the period this is allowed for years upon years.

    Our Tip: Shut-in royalty payments should be limited to gas wells, and should have a definite time limitations. 2 years is a reasonable maximum. In certain rare cases, it is reasonable to include an oil well, but this is fact specfic based on location and other factors.

  • Their Trick: Oil companies trade leases all the time. Who you sign with may not be who drills the property. And not all oil companies are created equal.

    Our Tip: Preventing an assignment of your lease probably isn’t possible. But you do have a say in who can or can’t develop. If you have a good, bona-fide reason why a particular operator shouldn’t drill your minerals, you can say so.

    In most cases, allowing an Assignment is just fine, so long as the oil company provides you with notice of the assignment. Failure to provide a timely notice should be compensated by a reasonable fee for each day they fail to honor this promise.

  • Their Trick: They will offer you a bonus to sign a lease based on the number of net acres you own, but if they mess up their math, they’ll ask for the money back.

    Our Tip: It’s not your job to do their homework. If they offer X Dollars, that is the price, regardless if their math is right or not. You should disclaim all warranties and make the lease bonus non-refundable.

    Note: If their math is wrong, the oil company does retain the right to reduce your royalty payments accordingly. You probably will not be able to limit this much, absent unusual lease bargaining power.

A Little More Advanced

  • Pooling allows an oil company to combine small tracts of land into one larger unit to drill a well. It’s not a bad thing, but is often abused.

    Their Trick: Overly broad pooling language in a lease, allowing the oil company the ability to pool massive amounts of land

    Our Tip: Pooling should be allowed, but limited by a Pugh Clause and Retained Acreage provisions, discussed below. These provisions allow the oil company to develop the minerals with flexibility, but will not hold unproductive lands and depths in perpetuity.

  • Continuous Drilling obligations are beneficial to both parties. They allow the oil company a dependable schedule to develop large properties, and provide a mechanism for mineral owners to safegaurd against laziness or a wasteful operator.

    Their Trick: They probably won’t offer you a Continous Driling Clause (CDC) voluntarily.

    Our Tip: Ask for one. They’ll know exactly what you are talking about. The CDC provision should be coupled with Retained Acreage langauge (discussed below), so that after the CDC time period ends, unproductive lands and depths are automatically released. The CDC time limitations should be reasonable for the area and contain tight definitions of relevant terms, such as “commencement” and “completion”. An oil and gas attorney would be useful in this area.

  • A Pugh Clause requires the oil and gas company to release unproductive lands.

    Their Trick: They may not offer a Pugh Clause unless asked. And if they do, it may be unreasonably broad.

    Our Tip: The Pugh Clause should work together with the Retained Acreage clause so that only a reasonable maximum amount of acreage is held. What is reasonable depends on location, geology, and what product is being obtained.

    Your should also request a Depth Severance Pugh Clause, where depths above and below the productive well are automatically released as well.

  • Retained Acreage (and Depth) provisions are similar to a Pugh Clause. The effect is to automatically release portions of the leased premises.

    Their Trick: Besides not offering one voluntarily, their Retained Acreage provision will be very broadly drafted so that a large amount of land, and all depths, are held by a single well.

    Our Tip: The Retained Acreage provision should be very narrowly drafted. The amount of acreage held varies, and an oil and gas attorney would be key in helping you draft this. It should also release unproductive depths, both above and below the subject well.

  • Their Trick: Witholding payment of royalties for an unreasonable period of time, with no incentive to pay.

    Our Tip: A Lien on Royalties provision should add a little bite to your lease and provide extra motification for the oil company to pay you timely. This provision isn’t always necessary, but if you own a large interest it would be prudent to add.

  • Force Majeure is a common contract term, allowing a party extra time to perform in the face of unforeseen circumstances, such as war or acts of God.

    Their Trick: Very, very broad force majeure language, allowing the oil company unreasonably long periods of time to delay operations, even if their own fault.

    Our Tip: Force majeure language is reasonable, but should be narrowly drafted. It is intended to cover things outside the control of the oil company, such as war, natural disasters, and the like. It should not cover things an oil company can control, such as financial difficulties, pipeline access, market prices, and foreseeable risks.

  • Their Trick: The most basic of land protections. Pretty much limited to burying pipelines a few feet underground. Though they don’t even do this.

    Our Tip: If you own the land and minerals, you have ample power to dictate how the land itself should be treated. This is an area that ERGF focuses on. In fact, we rather negotiate this than monetary terms like bonus and royalties.

    We recommend talking with an oil and gas attorney, or referring to the State of Texas (or a relevant equivalent) land damage schedule for more ideas.

  • Their Trick: They won’t offer this type of language in their lease form voluntarily.

    Our Tip: It is reasonable and customary for larger mineral owners to request indemnification provisions. There isn’t much reason smaller owners can’t request it as well.

  • Their Trick: They won’t offer these terms voluntarily.

    Our Tip: This is another area where we focus. Oil and gas companies typically agree to reasonable environmental protection terms, even for smaller mineral owners. They know it will be difficult for you to actually see what is going on out there, which is probably true. But, having these protections is still important. And if carefully drafted, it can allow access to information and a bit of bite to your lease.

Here you will find tips, resources, FAQs, and other information useful when negotiating an oil and gas lease. Our Earth Resource Learning Lab (ERLL) aims to give you a leg up and empower you to negotiate a favorable lease.