The Mineral Lease is an agreement between two parties, being the mineral owner, who becomes the Lessor, and the person or company interested in exploring the those minerals, who becomes the Lessee.
HOW LONG DOES AN OIL AND GAS LEASE LAST?
Under the Mineral Lease the Lessor grants the Lessee the right to explore and produce minerals found beneath the surface of the land. Similar to an apartment lease, the Mineral Lease only stays in effect for a certain period of time (usually 18 to 36 months), called the Primary Term, unless certain conditions are met. If the Lessee is able to produce Oil or Gas then the lease usually continues in effect until it ceases to produce in paying quantities.
WHAT WILL I BE PAID FOR MY LEASE?
In exchange for allowing the exploration of their land and extraction of their minerals, the Lessor is compensated in several ways. Most Lessees will pay a Bonus to the Lessor. The Bonus is usually calculated at a negotiated dollar figure per net mineral acre ($/nma). The Lessee then pays the Lessor a percentage of the gross revenues, called Royalties, that come from the sale of Oil & Gas. The Royalty is usually between 12.5% and 33% (1/8 and 1/3). The remaining revenues belong to the Lessee and are called the Working Interest. While the Working Interest owners are getting 2/3 to 7/8 of the revenues, they are also responsible for paying 100% of the expenses. So while the Lessee is getting paid more money and covering all the expenses, the Lessor can sit back and get “Mailbox Money”.
WHAT IS A PUGH CLAUSE?
“Pugh Clauses” allow portions of mineral leases to expire as to surface area or depths that are not timely developed by a Lessee or operator. If a lease has effective Pugh Clauses then usually the lessee will have to release any acreage or depths not actively included in a drilling or pooled unit at any time after the Primary Term
SHOULD I WARRANT TITLE TO MY MINERALS?
Most Lessees are sophisticated parties. In order to successfully explore for oil and gas the Lessee will need to arrange for leasing, permitting, drilling, and operating. This is no small undertaking, usually requiring at least 40 acres for a vertical well or 640 acres for a horizontal well. There are a lot of hours that go into preparing to drill a well and part of this process should include due diligence by the Lessee and their Landmen. A prudent Lessee will run title to identify the true owners of minerals, so there is often little need for the Lessor to warrant title. A Lessee will certainly prefer that the Lessee warrant title to make sure that they are protected in case they have made a mistake in their title search.
WHAT IS A LEASE MEMO?
The Mineral Lease should detail all the terms of the deal between the Lessor and the Lessee. The one exception is the amount of the bonus, which is usually covered in the consideration portion of the lease by explaining that the Lessor is being paid “Ten dollars and other valuable consideration.” In an area known for good Oil & Gas reserves the other valuable consideration can be millions of dollars. Because a Lessee may need to enter into leases with many mineral owners, it is important to conceal deal terms to make sure that top dollar is not being paid to every mineral owner, thus making the exploration non-economical. A Lessee will usually draft a Lease Memo at the same time as the Mineral Lease. This Lease Memo is then filed in the County records where the minerals are located. This puts the world-at-large on notice that the minerals are under lease. The Lease Memo will be a short summary explaining that the Lessor has leased its minerals to the Lessee for the number of months contained in the Primary Term and so long as production continues in paying quantities. The Lease Memo will not reveal the Royalty, Warranty status, Pugh Clauses, and other material terms.
WHO CAN I CONTACT ABOUT AN OIL AND GAS LEASE?
At Bower PLLC we negotiate and draft leases on behalf of our clients. For mineral owners we include key provisions to make sure that lease terms adequately protect client interests and are upheld. Our E&P clients count on us to include lease language that allows them to successfully complete their drilling program without overly burdensome terms.
If you have questions about Oil & Gas mineral leases, call Bower PLLC at 214-799-2142 or reach out to us using the contact form below.
This page was originally posted on 5/24/2018.