Have you received an offer to lease your minerals? At G&W we have been helping clients negotiate oil and gas leases since 1967. In the last ten years alone, we have helped thousands of mineral owners gain more than $150 million in oil and gas lease bonuses. Perhaps more importantly, we have helped mineral owners protect their right to receive royalties free of improper deductions, and their right to lease again in the future.
The Oil & Gas Lease is a contract, an agreement between the you, the mineral owner or lessor, and an oil and gas company, the lessee. To put it simply, you own the minerals and the oil and gas company wants to them. The Oil & Gas Lease is the contract that gives the company the right to use your minerals. Absent the lease, the company has no right drill and extract your minerals from the ground. However, without the company, most mineral owners lack the means and expertise to generate value from the minerals they own. Thus the Lease brings together the owner of the minerals with the party who can make use of them.
Like all contracts, the Lease is a binding agreement between two parties. It sets out the rights and responsibilities between each side, defining what each party must give up in favor of the other. Because the Lease can last for generations, it is imperative that you fully understand the terms contained therein.
The Lease controls the relationship between you and the oil and gas company for as long as the Lease is place. Most Oil and Gas Leases are offered on a 3-year term. But this term is automatically extended if a producing well is drilled and completed. If and when that occurs, the Lease stays in force and effect until there is no longer a producing well on the Lease. In many cases this means that the lease can be in place for 30 to 40 years or even longer. This makes the language in the lease even more important, because once it is agreed to, it cannot be changed unless both parties agree.
Often the most inciting and immediately gratifying part of the oil and gas lease is the opportunity to obtain a lease bonus. This is an upfront fee paid to the mineral owner simply for agreeing to lease. As a mineral owner, you get to keep this money even if the oil and gas company does not drill a well. The lease bonus is usually expressed in terms of a price per acre of minerals owned and open to lease. For this reason, it is important that you and the oil and gas company agree on the total number of acres on which you will be paid. The lease bonus often presents the best opportunity for G&W to help you maximize your revenue from the lease.
The royalty rate represents the percentage of revenue you will receive if and when a producing well is completed on your lease. If no well is drilled, you will not receive any royalty. If a well is drilled, but does not produce oil or gas, you will not receive royalty. However, if a producing well is completed, the royalty represents the opportunity to earn income from your minerals for decades to come.
In Oklahoma, the minimum royalty is a 1/8 (or 12.5%) of the revenue generated from the minerals you lease. The most common royalty offered and accepted with an oil and gas lease is a 3/16 (or 18.75%) royalty. However, higher royalties ranging from 1/5 to 1/4 are becoming more common.
When leasing, it is important to weigh the likelihood of a well being drilled. As the royalty being offered goes up, the lease bonus goes down. Therefore, in areas where it is less likely that a well will be drilled it is often better to accept a higher lease bonus and lower royalty.
Conversely, when you know that a new well is likely (such as when a surface location has been started or the requisite filings have been made with the Oklahoma Corporation Commission) it is better to take a higher royalty. Unfortunately, as the royalty has such a potential for revenue over time, it also presents the greatest opportunity for abuse. This is where lease language becomes exceptionally important, especially as to terms like “gross” versus “net” and whether a lease allows or prohibits certain “deductions.”
Improperly managed, this is where you risk losing 30% or more of your royalty revenue for the life of your lease. This is why having your lease reviewed by a professional is imperative.
The important thing to remember is that words matter. You should have your lease reviewed by an experienced professional who is employed to work for you, not for the oil and gas company. Never blindly accept the first offer, and don’t just sign a lease because the lease bonus is favorable. The devil is in the details.
With offices in Clinton, Weatherford, and Oklahoma City, our firm serves clients throughout Oklahoma.