How to Negotiate Oil and Gas Lease Terms

You’ve been approached by a representative or landman from a local oil and gas producer to explore and extract mineral deposits from the land beneath your home. He’s discussing leasing options on the mineral rights to your property. But, what does that mean? And, how should you approach this opportunity? Sure, it may seem like a chance to strike it rich, but it’s time to read the fine print.

Hiring a Lawyer

Any transactions effecting your property and level of ownership should be evaluated by legal counsel. First, determine if you own the mineral rights to your property (In some states, you only purchase surface rights to the physical structures and surface soil). Then, you can discuss leasing this subterranean section of your land. An attorney can draft a binding agreement between you and the oil and gas company so that all parties involved are aware of the terms and conditions of the lease.

If the oil and gas company presents a standard contract, have a neutral lawyer, who is not employed by the oil and gas company, review the document before signing.

Questions to Ask

When negotiating the lease terms, define every single step of the process, from exploration to drilling and processing. The way to do this is by asking questions of the oil and gas company representative.

Here are a few things to ask and include in the contract:

Will I, the landowner, get paid royalties based on production in addition to the monthly lease amount? How will royalties be paid? What is the monthly lease amount?

  • While leasing my land, what percentage of legal rights do I retain?
  • What specific minerals are you seeking and excavating?
  • What methods of mineral extraction are allowed within this lease?
  • How long does this lease last? Are there penalties if I need to break the lease?
  • May I sell my home and surface rights during the term of the mineral rights lease?
  • How many acres of my land will you be leasing?
  • How much and what type of equipment will be placed on my land?
  • How much surface area of my land (above ground) will you need to use?
  • Will you need to construct roadways, fences or water sources?
  • How will you dispose of wastewater used in the drilling process?
  • How far away from my home will your surface equipment be located? How loud is it, and what time of day will it be operating?
  • Will you be drilling a ground well for your water needs? How much will I be compensated for using the water on my land?
  • Explain the surface land restoration process after you’re done with the lease.
  • Who can I contact during the term of this lease if a question or concern arises?

Signs of a Good Deal

An honest landman will work with your requests and negotiate. After discussing them verbally, these provisions should be noted in writing as addendums to the oil and gas lease terms.

Do some research about the oil and gas company that is approaching before signing anything. How many drilling permits have been issued to them? What’s their reputation? Locate some of their current lease holders and find out if they are happy with the terms and conditions presented in their leases. If they live locally, ask to visit their property so you can see the oil and gas extraction process first-hand.

When negotiating a contract with a reputable company, there should be no hesitation when you pose questions or ask to connect with their current customers.

Typical Lease Provisions

Negotiating oil and gas lease terms isn’t a new venture for oil and gas producers. However, there isn’t an industry-wide, standard contract for this process since each parcel of land presents its own unique requirements.

You may be presented with a Lease Form by a landman from an oil and gas company. Above all, remember that the terms are negotiable and you shouldn’t sign the form without thoroughly reading and discussing each section with an attorney, especially if you’re being presented with lease offers from multiple companies.

All contracts should outline what happens if a lessee breaks the conditions of the contract or caused damage to your property during the discovery, excavation or production process.

The specific provisions (including duration of the lease and stipulations) in your personalized lease will depend on the amount of land you own, how close your property is to a known mineral-producing area and whether or not other companies are also interested in your land.

In addition to a complete explanation of their processes, goals and intentions, here are a few common sections you’ll find in an oil and gas lease contract:

  • Lease terms: This will state the duration in years and months that the oil and gas company has access to your property. This may be divided into primary and secondary terms, with specific provisions for each phase of the excavation and production process.
  • Lease payments: This section will itemize your monthly lease payment from the oil and gas company along with any production royalty, shut-in royalty, bonus or delay rental pay outs to keep the lease in good standing when no production has occurred on the land.
  • Post-production costs: The contract should detail the entire process, including what happens after they’re done excavating your land. Who will pay to disconnect the pipeline and restore the surface of the property to its pre-existing condition?

Above all, remember you are negotiating the rights to your land. You are in control of the terms and the lease. You don’t have to accept the first offer or first draft of a contract. Leasing your mineral rights to an oil and gas company can be a profitable experience if you take the time to understand every aspect of the process before signing a contract.

For more information on oil and gas production in Denver, Colorado or in general, contact the experts at BWAB.