» How can I negotiate an oil and gas lease?

How can I negotiate an oil and gas lease?

If you are approached to lease your mineral interests, perhaps the most important thing you can do is hire a knowledgeable and experienced oil and gas leasing lawyer to protect your interests. While it is not recommended, if you decide to go it alone, here are a number of matters you may consider:

  • 1. Learn about the company that wants to lease your land. The Railroad Commission website is a valuable resource in this area. Only do business with someone you think you can trust.
  • 2. Before negotiating the details of the lease, agree on the basic lease terms. Those terms generally include the amount of the bonus, the length of the primary term, the amount of royalty, the amount of any delay rental and the amount of any shut-in royalty. Sometimes, there may be options to extend the primary lease term, drilling commitments, pooling agreements, royalty adjustments after “pay-out” and minimum annual royalties.
  • 3. Determine which lease form will be used as a basis from which to start negotiations. Most oil companies will likely seek to use a variation of the Producer’s 88 form which is generally quite favorable to the oil company. Your ability to negotiate the various terms of the lease will generally depend upon how much the oil company wants your property. Do not be bashful about attempting to negotiate any of the terms.
  • 4. Be careful and precise with respect to the description of the leased premises. Have separate leases if possible for non-contiguous tracts. Delete any “Mother Hubbard” clause if possible.
  • 5. Attempt to limit or prohibit deductions of post-production costs from royalties, if possible. Be very careful in this regard as language that would appear to limit or prohibit deduction of post-production costs has been found by Texas’ courts to not do so. You would be well advised to consult an expert or the law on this issue.
  • 6. Attempt to limit the lease to only oil and gas, and not for other minerals.
  • 7. If possible, define what types of “operations” will maintain the lease and what will constitute drilling operations.
  • 8. If appropriate, negotiate pooling restrictions.
  • 9. Consider “pugh” clauses and horizontal and vertical severance clauses.
  • 10. Determine whether there should be any limitations on assignment of the lease.
  • 11. Delete the warranty of title or make sure you are comfortable with the warranty.
  • 12. Negotiate where possible to eliminate or limit the force majeure clause.
  • 13. If possible, make sure the indemnity clause is sufficiently tailored to satisfy any express negligence requirements.
  • 14. Seek agreement that division orders will not amend lease provisions.
  • 15. If possible, require that the bonus be paid with a check as opposed to a bank draft.
  • 16. There are many other considerations that go into negotiating an oil and gas lease and, again, we highly recommend that you seek professional advice before executing one.

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