12 Things to do Before Signing an Oil and Gas Lease
Have you recently received an offer to lease your minerals?
If so, make sure to do these 12 things before signing on the dotted line:
- Know What You Own
- Be Courteous
- Ask Questions
- Negotiate
- Understand Current Lease Bonus and Royalty Rates
- Research Production Activity in Your Area
- Request Special Lease Provisions
- Reduce Risk
- Close Like a Pro
- Request the Lease to be Filed “As-Is”
- Get Organized
- Stay Informed
Proper management of one’s mineral estate can be a very difficult and time-consuming endeavor. However, this guide will give you the tools and information necessary to make smart decisions and generate more cash from your minerals.
And always remember the 5 Ps; Prior Planning Prevents Poor Performance.
1. Know What You Own
There are many different types of mineral interests, and having a basic understanding of which type you own is important. Owning 100% of the minerals into your tract really puts you in the driver’s seat when it comes time to negotiate.
If you don’t own all the minerals into your tract, don’t worry! There are still things you can do to strengthen your negotiating position, such as teaming up with the other undivided owners around you. Negotiating together can really put you in a place of power.
Keeping good records of your net mineral acres on a tract-by-tract basis and knowing what you own is crucial when entering negotiations.
2. Be Courteous
When negotiating, remember that both parties have a shared interest in getting your minerals leased. Typically, the landmen that reach out to you about your minerals work on behalf of a company. It’s their job to come to a fair agreement for both parties.
Common decency goes a long way and having a good relationship with your landman could help when you come to a crossroads. They’ll be more likely to go to bat for you to get more favorable terms during lease negotiations or pick up the phone down the line if you have questions.
As with any industry, there are some people who look to benefit themselves at the expense of others. Keep a cautious yet open-mind when dealing with landmen representing themselves, or an unknown company.
3. Ask Questions
While the landman reaching out to you may be reluctant to share certain development details or information about the operator’s plans, you should do your best to use these lease discussions to get as much information about your mineral estate as possible. The following questions, if answered, will pay dividends down the road when managing your minerals:
a. Can you please share an ownership report or title opinion which outlines my interests?
b. Can you please share a map outlining my tracts?
c. Can you please share what formations you are interested in testing in this area and at what depths they are located (roughly)?
d. Will you be drilling horizontally or vertically?
e. Who will be the operator of this well?
f. Do you have any surface locations for development planned? If so can you please share that information?
g. Do you need surface locations, water for drilling and completing, or a disposal location?
h. What are the biggest challenges of drilling and completing wells in this area?
Answers to the above questions should be organized and saved on a tract-by-tract basis so that you can begin building out comprehensive files for each interest you own. This information will be crucial in negotiating your lease provisions, as well as surface use provisions if desired or applicable.
4. Negotiate
Everything is negotiable.
Again, EVERYTHING IS NEGOTIABLE.
The offering party will never open with their best offer. When you bought your home did you offer the sellers exactly what the listing price was with no contingencies? In most cases, there were likely some negotiations and a deal was struck somewhere along the way.
When a landman calls and makes an offer to lease your minerals don’t be offended if the offer seems low. There is almost always room to go up — respectfully decline and counter the offer.
Knowing what to counter with is the hard part. That’s the topic for the next point.
5. Understand Current Lease Bonus and Royalty Rates
Understanding the current market for lease signing bonuses and royalty rates in your area is critical when determining a counteroffer during negotiations.
Many mineral owners turn to the internet to find an “average” bonus per acre and royalty rate for oil and gas leases. The truth is there is no “average” value, and current market prices vary widely depending on location. It is important to determine the current rates in your immediate area.
Historically, discovering the current lease bonus prices and royalty rates in a given area was very difficult. Mineral owners looked to family and friends, attorneys, forums, or competing Lessees for guidance on the current market value.
Luckily, this information is becoming easier to find as technology advances.
Mineral Insight is a free online resource that provides a comprehensive map showing oil and gas royalty and bonus rates, allowing users to easily compare their offers to those around them.
Keep in mind that most lease negotiations are time sensitive. Lessees are often under pressure to come to terms and get an agreement struck. In very hot areas it may make sense to take your time through these negotiations with hopes of receiving additional competing offers. Alternatively, in areas with little activity, it might be beneficial to strike a deal while the iron is hot!
6. Research Production Activity in Your Area
Look to your state’s Oil and Gas or Department of Natural Resources Agencies for a GIS (geographic information system) web map. These regulatory agencies oversee the entire production life-cycle from well permitting to production to plugging a well. It is their duty to keep up-to-date records and account for any changes. Therefore, it’s the best free source to find recent permitting or drilling activity in your area.
Permit approvals are required by the state before an operator is allowed to drill a well. They are an important piece of information because they can show the intention to drill up to 2 years before the event. Understanding where they are relative to your property will give you an idea of upcoming activity.
Well production is reported monthly and provides a way to see how healthy the wells are around your property. With a little legwork, you can understand well longevity, total production, decline rates, and other metrics for understanding the potential value of your asset.
Below are links to some state regulatory agencies and their web-maps:
Colorado Oil and Gas Conservation Commission
Louisiana Department of Natural Resources
Montana Board of Oil & Gas Conservation
New Mexico Oil Conservation Division
North Dakota Department of Mineral Resources
Ohio Division of Oil and Gas Resources
Oklahoma Corporation Commission
Wyoming Oil and Gas Conservation Commission via Wyoming State Geological Survey
7. Request Special Lease Provisions
Coming to terms on the bonus per acre and royalty rate is only half the battle. Understanding that money is made in the details of the lease language is crucial. A lease is a contract that can live on for decades. Tens or even hundreds of thousands of dollars could be lost or tied up with poorly written language!
Below are three important provisions to consider (among others) for maximizing the value of your minerals and making the most money over time:
1) Release Language — Having proper Pugh and depth severance language in your lease can allow you to make more money. This type of language is becoming more prevalent and companies are more readily accepting such provisions. These two clauses are pretty basic and if included mean that the operator can hold only the acreage and depths that they are producing from. This means that any non-producing depths can be leased to another company!
2) Cost-Free Royalty Language — Ask for a cost-free royalty, as some operators will readily accept this request. While the agreed-upon royalty doesn’t go up, you are no longer burdened with the costs that the operator incurs in order to get your product to the point of sale. This means more green in your pocket on a monthly basis!
3) Non-Surface Use Language — A standard mineral lease grants the Lessee reasonable access to the surface in order to produce the minerals below. However, to protect the rights of the surface owner, a Non-Surface Use Clause can limit the uncertainty around certain events such as damages to the property.
A Surface Use Agreement can be negotiated separately and is a great way for surface owners to monetize their assets.
8. Reduce Risk
Peace of mind is priceless. Reduce risk or liability by striking or removing the Warranty Clause and requesting an indemnity clause in the lease.
The Warranty Clause provides a warranty of title from the owner (Lessor). In the event it is determined the Lessor own less than originally thought, they may be required to repay certain bonus or royalty payments. If you receive pushback in removing this clause, settle with ‘Special Warranty’ which limits the warranty of title by, through, and under actions by the current owner, and not predecessors in title.
An Indemnity Clause shifts certain liabilities from the Lessor to the Lessee, protecting them from unforeseen events out of their control. In the event that someone is severely injured or killed, or property is damaged, the Lessee holds the Lessor “harmless” and “defends” them against a potential lawsuit.
9. Close Like a Pro
Once you have come to terms on the bonus, royalty, and provisions, it’s time to close!
DO NOT accept any drafts or promissory letter agreements.
The closing process is very simple:
Step 1: Send a scanned copy of the lease to the Lessee.
Step 2: The Lessee mails you the check.
Step 3: Once the check is received, mail a hard copy of the lease to the company.
This practice creates a sense of urgency on the company’s part to get you paid. It also protects you as the mineral owner from a prolonged delay from anyone looking to shop or flip your lease before they have to pay for it.
10. Request the Lease to be Filed “As-Is”
Companies nowadays are filing a memorandum of the lease agreement instead of the lease itself.
Memos outline the basics and show a lease agreement has taken place, but don’t show crucial information that would allow an outside party to determine which events open certain acreage up, such as Pugh or depth severance language.
This makes it more difficult for other companies to recognize when land opens down the road — potentially wasting months or years the land could have been paid for and leased.
11. Get Organized
After signing a lease it’s easy to cash your check and put all this painstaking work and negotiation behind you, but don’t!
Data and understanding is the most important aspect of properly managing a mineral estate. Before you cash your check, organize all of your paperwork and notes while they’re fresh. Gather copies of your executed lease and other agreements. Save all of your old offer letters, even those from competitors.
You will thank yourself down the road when you receive a new lease offer or, better yet, a division order and need to refer back to your old documents.
12. Stay Informed
The leasing portion of your mineral management may be temporarily complete, but staying in the know will keep you prepared for what’s to come.
Once a well is permitted in your area, or better yet on your tract, you will likely begin getting offers from mineral buyers looking to purchase your interest. These offers may seem appealing, but understanding how many wells are permitted and production potential will help you juggle this decision.
Managing your minerals can be a time consuming and daunting task even for industry pros, but remember that there are resources available to help. Knowledge is money in this business, so the more you know about your area and your interest the more money you can make!
If you have any questions, need help, or just want to talk, the Mineral Insight team would love to hear from you!
