Before I can discuss how to make money off an oil and gas lease, it is important to discuss the rights related to an oil and gas lease. An oil and gas lease is a hybrid between a deed and a contract and has elements of both. It is not like an apartment or shopping center lease. Over the years, the oil and gas lease has evolved into its present state. In order to help explain just exactly what an oil and gas lease is, I will borrow liberally from a scholarly article written by Ryan Ray. He writes, “Oil and gas leases present unique legal issues, and the law governing their execution, duration and interpretation is distinct from ordinary principles of property law or contract law.”
The Law of capture: May be summed up: Under Oklahoma law, the owner of a tract of land does not hold an ownership interest in the oil or gas under his land until those substances are extracted to the surface and reduced to possession. The Oklahoma doctrine of oil and gas ownership is commonly referred to as the “exclusive-right-to-take” theory. Early on, the Oklahoma courts recognized that oil and gas are “fugacious [substances] and are not susceptible to ownership distinct from the soil.” That is correct, until the oil and gas are separated from the soil. Thus, The Law of Capture, means, the first one to get it owns it.
With this realization, the courts concluded that the rule of capture applied to fugacious minerals – such as oil and gas – that were capable of subsurface migration within a reservoir. Under the law of capture, a landowner or mineral owner has the “exclusive right to drill for, produce, or otherwise gain possession of [petroleum-based] substances.” Included in these exclusive rights is “the right to reduce to possession oil and gas ‘coming from land belonging to others.’” The rule of capture allows a landowner or mineral owner to drill as many wells as they wish, drill those wells as close to the boundary line of neighboring tracts of land, and operate the wells in the most efficient manner possible. The neighboring landowner’s remedy is not an action for conversion or equitable relief to prohibit or reduce their neighbor’s operations. Rather, their remedy is to drill their own well. In modern times, the rule of capture has been made subject to the Conservation Act, which sets limits on well spacing and drilling in order to prevent waste and protect correlative rights.
The mineral owner holds many rights as a result of their exclusive right to take the oil and gas underlying a certain tract. Included in these rights are 1) the right to develop the minerals 2) the executive right (i.e., the power to execute a lease conveying the development right); 3) the right to receive bonus (i.e., a cash payment made for execution of a lease); 4) the right to receive delay-rental payments; 5) the right to receive royalty; and 6) the right to receive shut-in royalty.9 The owner of the mineral estate may, in theory, sever any or all of these interests to different persons.
It is essential to observe at the outset that, although it is called a “lease,” the common-law doctrines governing real-property landlords and tenants do not apply to an oil and gas lease. The oil and gas lease is sui generis; it is part conveyance, part executory contract.14 The oil and gas lease is a conveyance, as it is through the lease that the mineral owner conveys a property right to the lessee – usually an oil company – “to explore for and produce oil and gas, reserving a royalty interest in production.” The lease is a contract in that the lessee accepts these property rights subject to certain express and implied promises to the lessor.
While the oil and gas lease does not convey absolute title to the oil and gas that may lie beneath the surface, it does convey an interest in the land. An oil and gas lease must therefore be in writing and signed, as it falls within the statute of frauds.20 The lease must also identify the lessor, the lessee, the interest conveyed, and an adequate description of the leased premises.21 Also like a deed, an oil and gas lease must be delivered in order to be effective.
The Oklahoma courts have determined that the property right conveyed in an oil and gas lease is a “profit à prendre capable of legal existence as a servitude ‘unattached’ to land (in gross), and may be transferred in gross, either in whole or in part, as an estate in real property.”17 The profit à prendre, also known simply as the “profit,” is a common-law property interest that is a “liberty in one person to enter another’s soil and take from it the fruits not yet carried away.” The analogy that Oklahoma courts have often used to describe the profit is that it is similar to a right to enter onto another’s land and either hunt or fish.
These rights and duties that I have been discussing are put into real prospective when they are translated into: money. How can one monetize the inherent rights related to the ownership of mineral interests? How can one turn an oil and gas lease into spending money?
Making Money Off the Oil and Gas Lease
Helpful hints for negotiating a winning position on and Oil and Gas Lease: Number one above all the rest: hire an attorney who will obtain for you the highest and best offer.
First, do not accept the first offer presented to you by an Oil & Gas exploration company to lease your minerals. Most companies use independent agents, (landmen) brokers, to buy oil and gas. The agents usually have the authority to negotiate within a very small window and are not allowed to evaluate the worth of your particular acreage. Most brokers, based upon their history of performance have to get approval for any counter-offers from their client. the First offer is on the low end of their range and they get credit for buying low.bargaining power will depend on the following;
Second, bargaining power begins with attitude and the belief and knowledge that good legal advice gives. Feel confident, after consulting an expert that A: The amount of mineral acres you own is a lot and that the buyer needs to close the deal. B: The amount of nearby production is very close to the new location site and that the well will produce a great amount of oil and gas. C: If there are companies competing for leases, you have it made in the shade. D: You should first negotiate the following; the bonus amount for the lease, the share of royalties and the primary term of the lease. The bonus and royalties differ dramatically from county to county and from section to section, the bonus is based primarily on the production history, potential of the area being leased and the competition. An average lease term should be about 3 years (it is not advisable to agree to an extension option). Royalties vary widely depending on various factors, but for the most part the following might be considered as the corporation commission of Oklahoma sets out in forced pooling orders.
If you need further help with an Oil and Gas Lease, give me a call. 405 232-7980, Robert R. Robles, Attorney