What’s an Oil and Gas Lease?

An oil and gas lease is a contract between a landowner who retains the rights to the minerals on their property with an oil or gas company. This contract describes the development and extraction process that will take place on the land. The landowner conveys their mineral rights to the oil company who then can explore, develop, and produce oil or gas. The oil company pays rent, pays a royalty based on the value of the oil and gas, and will sometimes give the landowner a bonus.

What are Mineral Rights?

Depending on the state that you live in, the rights that you have to your property is separate from the rights to the minerals found there. You can find out if you own the mineral rights to the property by looking at the warranty deed.

Negotiating an Oil and Gas Lease

A landowner’s power to negotiate money for their property’s mineral rights is dependent upon a few factors. First, the size of the tract of land is important – the more acreage the better. Second, how close the property is to plots of land that have already proven to deliver oil or gas, and hopefully recently discovered.

Size of the Land

It depends on the type of well and the target formation. A well location can be as small as an acre or less, or could be as large as 10 acres in a situation in which multiple well bores are drilled from a single surface location.

Proximity to Proven Drill Sites

If a property nearby has been successfully drilled for oil or coal, odds are that your property might be as well. You can go to the website for the State Regulatory Agency, this governing body oversees all activities pertaining to oil and gas. You can search for wells that are currently producing oil, the names of local industry operators, and even recently approved drilling permits. If there are any nearby properties that pop up, it might be worth investigating if your property could qualify for an oil and gas lease.

What Determines an Oil and Gas Lease Term?

How long a company leases your land for oil or gas drilling is uncertain. At the least, the company will lease your property for five years, but the leasing party does so with the hopes that they will achieve their expected results, complete drilling of a well. If they aren’t able to complete the drilling process during that term, they might opt to extend the lease agreement. From there, the company would want to continue their lease as long as the well they drilled is still producing, and a well might produce oil or natural gas for decades.

Your Property Values Don’t Decrease and You Can Continue Other Activities on Your Land

When a well is built and a pipeline is constructed on your property, you might think that your land value would decrease, however this isn’t true. In fact, the royalties created from and oil and gas lease actually increase your property’s value. Furthermore, normal processes can take place on the land above the property. For example, farm owners can continue to farm like normal on the land directly above the pipeline. However, landowners wouldn’t be able to construct anything directly over it. Landowners can discuss with the leasing party that they would like to plan and route the pipeline keeping in mind their future or current plans for the property.

Some Oil and Gas Lease Advice

Multiple Plots of Land Should be on Separate Lease Agreements

The development process of an oil and gas site is an on-going process, and problems may arise that might not have been foreseen over the course of the lease. For each plot of land on which the industry operator wants to establish, there should be a separate lease agreement. This ensures that if there is a problem with one site, it does not affect the others.

Warranting the Mineral Title

When you warrant the mineral title, you are stating that you are 100% sure beyond a shadow of a doubt that you do own the mineral rights that you say you do. You are essentially guaranteeing to the leasing company that you own what you say you own. Even if the deed that was handed to you when you bought the property says you own the mineral rights, how can you be absolutely sure that you do? What if unbeknownst to you and everyone involved in the purchase of the property, there was a mineral reservation established a long time ago? That would mean you actually don’t own the mineral rights. If that were the case and in your oil and gas lease agreement you warranted the mineral title, you would be liable to reimburse the oil and gas company for any bonuses you were given for signing the lease and any royalties you received as a result of their efforts.

Determine How You Would Be Affected by the Water Used for Drilling

Most oil and gas leases presented to you will try and gain unrestricted access to fresh water on your property. The main reason for water use for oil and gas activities is for hydraulic fracturing. Hydraulic fracturing is the most common way to create wells for natural gas extraction. Water, sand, and certain chemicals are injected into the underlying area of the property to create or advance fractures within the rockbed to help free the trapped gas pockets. If a company has unlimited access they may very well use up all the fresh water resources on your property.

If this is something that could cause problems for you, it’s probably something you should look into discussing further with the company.

Consider Leasing Your Land at Landlease.com if You Are Interested in Being Approached for an Oil and Gas Lease

If you’ve done your research, and have a hunch that your property could potentially produce oil or gas, then you should list your land with us and select the attribute for traditional energy. Your property will be marketed specifically to companies within the industry who are looking for sites to establish wells.