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What to Know Before You Lease Your Mineral Rights for Oil and Gas

Updated on December 22, 2020
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I own a couple of rental properties and also do work as a handyman.

Leasing Your Land For Oil And Gas

When it comes to leasing your land for oil and gas exploration, or for that matter coal, gravel, or extraction of any other kind of mineral, you should be aware of all the fine print before signing any lease agreement. Oil and gas companies love fine print, and a few small words can literally be worth millions of dollars over the term of the lease, especially if oil or gas is discovered.

Oil and gas companies typically want to pay you as little as possible to lease your land and keep the lion's share of production for themselves. You can often negotiate both the amount of your up - front "bonus payment," and the amount of royalties. Royalties typically refer to the percentage of oil, gas or minerals that you get to keep or receive revenue from when they are sold.

If there is oil and gas drilling activity in your area and if companies are interested in your land, most likely you will be approached by an oil company "land man", not the other way around. If there is active production in your immediate area, and you have not been contacted by an oil company, you may wish to contact an oil lease broker who, (for a fee,) can often negotiate with oil for the best deal.

Knowledge Is Power, Stay Informed!

Oil and gas lease brokers and regional landowners groups can help save you time and often put more money in your pocket. In areas such as the Utica Shale of Ohio, for example, landowners such as the Central Ohio Landowner's Association have helped bring together adjoining landowners and negotiate higher lease payments and royalty percentages with oil companies.

Another excellent way to learn about issues such as fair prices for oil and gas leases, bonus payment amounts, royalty percentages, damages due for oil drilling on your land, etc, is to join an online community of people such as yourself. You might try joining an online mineral owner's forumand discussing oil and gas leasing in your area with other members.

Important Clauses In Oil And Gas Leases

There are many clauses that you can insert into an oil and gas lease which will help protect your interests. You can also have a lawyer strike unwanted language from the lease you are offered, such as language that ties non-adjoining tracts of land into the same lease terms. For example, oil companies may be able to tie up multiple parcels of land, simply by making a well on one of the tracts that you own, even if it is located somewhere else. By having language in your lease agreement that requires them to develop each tract of land separately, you may be able to see more revenue over time since more wells may be drilled. Additionally, you don't have to grant the oil company the rights to drill all depths under the earth. If they are leasing your land primarily to explore one zone, such as the Marcellus Shale for example, you can have your lawyer insert language into the contract that limits their exploration rights to that zone, by inserting a depth clause.

Should You Ever Sell Your Mineral Rights?

You may be tempted to sell your mineral rights, especially if you are offered hundreds or even thousands of dollars per acre. Selling all of your mineral rights is almost never a good idea. If a broker or agent has approached you with an offer to buy your mineral rights, chances are this in itself is an indication there is something valuable beneath your property. By selling your mineral rights in total you may forfeit any future royalties from any minerals or oil and gas extracted from your property.

Final Thoughts On Leasing Your Land For Oil and Gas

Remember that in most situations you have a certain amount of leeway when negotiating an oil and gas lease. If the terms of the deal are unfair, you can always refuse it and wait for a better offer from another company. (It is important to note however, that if you only have a small parcel of land, your negotiating power may be diminished. This is especially true when one oil company controls most of the leased acreage in your area.)

Oil and gas companies should pay you a fair amount for the "bonus money" or up front lease payment, in addition to granting you a fair share of royalties. You are also entitled to compensation for damages to your land caused by oil and gas drilling and the placement of production equipment and pipelines. You should be compensated for area where the well and tanks are located as well as for damage to crops and grassland from the digging of pits, pipelines and oilfield roads. You can negotiate an amount of compensation for immediate damages as well as for future roads and oilfield activity. (This applies to all landowners, not just those who own the mineral rights.) Therefore, if you just own the surface rights to your property, it is still wise to contact an attorney in your area who can help you work out the best deal with the oil company.

Consulting with a good oil and gas attorney before signing a mineral lease is a must. Their fees are generally cheap, and you will likely sacrifice some of the profit that you make from the first lease bonus payment, but the deal that you agree on can be much better for you in the long run.

Finally, remember that in the end, you do not have to lease your land for oil and gas drilling. If your own values regarding your property or the environment do not align with oil and gas drilling, by all means do not lease to an oil company. Beware though, because in some states the oil company may be able to extract oil from under your property without your consent. Regardless of whether you chose to lease or not, consulting with and oil and gas attorney is crucial.

If you are not careful oil companies may leave abandoned tanks and equipment on your property if you do not have the proper language in your lease requiring its prompt removal.
If you are not careful oil companies may leave abandoned tanks and equipment on your property if you do not have the proper language in your lease requiring its prompt removal.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2008 Nolen Hart


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