Nothing in this article is to be considered legal, tax or investment advice. Please consult with your attorney and tax professional.
Mastering Oil and Gas Lease Negotiations
A professional from a local oil investments firm wants to explore and extract oil and gas in your property. You are talking about the available mineral rights leasing options for your property. Do you know what this means? How would you approach an offer such as this one? While this may be an opportunity of a lifetime, it is essential to read the fine print.
Hiring an Attorney
A qualified and accredited attorney must thoroughly assess any business transaction regarding ownership of your property. To begin with, make sure you have full ownership of the mineral rights. In individual states, when you buy a piece of land, you only own the surface oil and surface rights to the physical structures. Next, determine how you can lease this part of your estate. Your lawyer can write a binding contract between you and the oil company so that everyone knows of the terms and conditions of the agreement. If the oil and gas firm has its contract, hire an independent attorney to help you review the lease before signing.
Signs of A Lucrative Deal
An legitimate oil and gas company should be willing to abide by your requests and be ready to negotiate. After having a verbal discussion, all the provisions must be stored as addendum to the terms and conditions of the lease. Research the landman before you sign to anything. Determine the number of drilling permits they have been issued with and their credibility. Get more information about the oil and gas investment firms from current leaseholders and determine if they are contented with offers on their leases. If they live within your locale, visit their sites and see the extraction process in-person. Never hesitate to ask questions, especially if you are dealing with a reputable company.
Crucial Provisions to Review When Negotiating an Oil and Gas Lease
Primary Term
This provision stipulates the duration a well is to be drilled or when the drilling process is to commence. Keep this section short to encourage the landman to drill within the agreed term. The primary term should not take more than three years.
Option to Extend the Lease
Certain leases offer a bonus if there is room to extend the lease. For example, some companies will offer a 2-year primary term with an additional year. This option may not be ideal for you if there is an increase in activity to where there is a chance for you to negotiate better leases after the primary term expires.
Royalty Clause
This section of the lease stipulates the percentage of production you are entitled to in case a well is successful. It protects you from taking in-kind payments in oil. Earlier, property owners would receive a royalty of 1/8th or 12.5 percent. Today, royalties range from 18.75% and 25% - This amount is negotiable.
Post-Production Clause
This clause is more crucial than negotiating the royalty itself. Most companies use language that entitle them to make oil gas tax deductions from the royalty payments. Transportation, marketing, processing, compressing, dehydrating, treating, and other associated costs can impact your royalty payment significantly. This matter is extremely critical because courts are backing these deductions when cases escalate to them.
Therefore, you may want to opt for a neutral and comprehensible language like require royalties to be free from both product and post-production expenses. The language should also link your royalty payment to the actual interests received during a sale where both parties are acting on individual interests, as opposed to the wellhead. If the company does not agree to cost-free provisions, reduce the deductions to a certain percentage of a barrel of oil produced or per Mcf of gas.
Therefore, you may want to opt for a neutral and comprehensible language like require royalties to be free from both product and post-production expenses. The language should also link your royalty payment to the actual interests received during a sale where both parties are acting on individual interests, as opposed to the wellhead. If the company does not agree to cost-free provisions, reduce the deductions to a certain percentage of a barrel of oil produced or per Mcf of gas.
Factors to Consider When Negotiating an Oil and Gas Lease
The Small Print of Oil & Gas Deals
Check the details in the fine print thoroughly to make sure it reflects all the details this lease should grant. As stated earlier, take note of the language which permits oil and gas drillers to subtracts money spent on getting oil gas to the market. This is not a good deal if you want to receive a royalty, yet all the costs have been deducted from transporting oil and gas from your royalty.
Notifications and evidence of lease transfer
Ask for advanced notification and evidence of lease transfer to third parties, and request payment when leases are transferred. Many leases allow oil and gas companies to hold the contract while they are drilling but not when producing. Your rights as a mineral owner should also be considered.
Language
Consider language or clauses that give the landman all the rights to hold their lease even when there is no production. A shut-in payment of $1.00 per annum net mineral acre may be suggested by the industry. While this amount may be negligible, wait for any language that allows them to deduct costs or use your property to their benefit. Oil investment is a sensitive field that requires a great deal of caution.
Your rights
Take note of any language that strips you your rights in the Wyoming oil and gas policy and split estate act. Do not relinquish your rights for surface use. Also, determine the rights that allow the lessor to pay for any taxes or liens on your property and then subtract that from the amount they owe you.
Nothing in this article is to be considered legal, tax or investment advice. Please consult with your attorney and tax professional.
Mistakes to Avoid When Negotiating an Oil and Gas Lease
Agreeing to One Lease for Multiple Lands
If you have several pieces of land, ensure that you get a separate mineral lease for each parcel. Do not lump all your tracts into a single lease. Individual leases might seem daunting to work on, but it helps to avoid serious issues which may occur. Oil investments are dynamic and require special oil and gas leases for each piece of land to protect your rights.
Saying No Before Your Consult Your Lawyer
Many property owners get overly excited when they receive mineral lease requests. Most of them do not consider the potential profits, other than the economic prospects. A smart property owner should not immediately respond to an offer. Research other lease proposals your neighbors may have received. Take caution that the landman might use forced pooling to lure you into agreeing to a lease. However, it may be to your advantage to negotiate your own lease rather than joining a forced pool.
What is forced pooling
The forced pool is a method that oil and gas companies use to join several tracts of lands to acquire enough acreage to get a well drilling permit.
Putting It All Together
If you are considering oil investments opportunities, one of the most important things to understand is a mineral lease. Leases are commonplace in the oil and gas industry. A solid mineral contract should address the needs and rights of both the property owner and the lessor. Working with professionals in the industry is an excellent way of getting started in the business. Contact United exploration for more information on current oil investments and opportunities in Texas, Oklahoma, and beyond.
Note nothing in this article is to be considered tax or investment advice. Please consult with your attorney and oil tax professional.
