Negotiation of a Oil and Gas Lease

A Binding Contract for Leasing Mineral Rights

An oil and gas lease is a legally binding contract for both parties involved. In most cases, a lease is set for a duration of 2-5 years if the energy company doesn’t drill. Once a well is drilled and found economically viable, the lease continues in perpetuity so long as the wells inside the lease are economically viable. If the well is not viable, the lease expires after 2-5 years depending on the lease terms. Terms of an oil and gas lease can be difficult to understand.

Confirming the Mineral Rights Owner

There are many clauses and stipulations that must be addressed. Entering into a contract with a large oil company can be daunting especially when a binding contract is involved. For a smoother facilitation of establishing a contract, energy companies usually assign a landman to the initial negotiations between a mineral owner and their company. The landman is also responsible for performing the basic groundwork of determining the correct mineral right owners. It is imperative that the mineral owner review the oil and gas lease in detail to make sure that the terms set forth are agreeable. If there are items in the contract that are unsatisfactory to the mineral owner , it is necessary to negotiate terms with the landman that will be acceptable. Sometimes these terms are simply adjusted while other times the items are altered completely. There are even times when an agreement can not be reached by either party.

Energy Companies know their Contracts, Do you?

Mineral owners are highly encouraged to seek legal counsel when entering an oil and gas lease. Energy companies have entered into many oil and gas leases and are very familiar with the process. However, a mineral owner may be completely unfamiliar with a lease and the negotiations necessary to create a lease that is mutually beneficial. It is important to remember that at times a mineral owner may feel distrust or hostility after reviewing the lease or during the negotiation process. Again, It is highly encouraged for the mineral owner to retain an experienced oil and gas lawyer to review the lease in order for the negotiation process to run more smoothly.

Lease Components

At the top, usually the right hand corner there is a date. This date is known as the date clause. It establishes the commencement date of the lease. The names of both parties that are legally bound to the lease are in the first paragraph. The lessor, who is the mineral rights owner, and the lessee, which is the energy company.

A legal description of the land is outlined. So that both parties may establish the exact plot of land that will be bound by this agreement. The duration of the primary term is mentioned in months. A clause that allows for a secondary term can also be added to a lease.

The royalty clause is usually a lengthy paragraph. This clause states the percentage or share of production proceeds the leasor receives. How the royalty is received is also mentioned in this paragraph as well. A granting clause is included in all leases.

The granting clause outlines the rights of the lessee and the property that is binding to the lease. The lessee’s rights include drilling, delay rental, pooling, shut-in royalty, unitization and additional drilling clauses. The lease also outlines the course of action that will be taken by the lessee if any such problems arise during the term of the lease like what happens when a dry hole is drilled within the primary terms.

A damage clause is also included in the lease as well. Another important clause in an oil and gas lease is an assignment clause. During the term of the lease if either party should choose to transfer ownership, the assignment clause outlines the stipulations that must be met. This is important to the energy company, as many energy companies transfer ownership of their leases.

The Force Majeure clause touches upon the state and national laws that it is necessary for any drilling rig to adhere to. They are clearly outlined and give the Lessee freedom from non-performance that could possibly be implicated in the lease.

Like many standard contracts there is a warranty clause. A warranty clause states that the mineral owner guarantees their legal right to the land to the Lessee if he or she should later be discovered to not be the true legal mineral right owners.