Negotiating an Oil and Gas Lease

Helpful hints for negotiating a winning position on and Oil and Gas Lease:  Number one above all the rest: hire a professional negotiater 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.

E.  12.5% – 16.67% = low end + higher cash bonus

F.  16.67% – 18.75% = moderate + lower cash bonus

G.  18.75% – 25% = high end + no cash bonus

H.  Ask ask for the following terms.

1. Vertical Pugh Clause- releases all depths below deepest producing zone;

2.  Horizontal Pugh Clause- releases all land not included in unit.  Use an acreage figure because sometimes there will be no unitization;

3.  Ask that the landman remove the Mother Hubbard Clause.

4.  Make sure the title on the lease is:  Oil and Gas.  You don’t want to unintentionally lease your coal, uranium, silver, gold, sulphur or other valuable minerals.

5.  Delete the warranty of title, otherwise if the landman makes a mistake and pays you a bonus you don’t deserve, then he can get you to pay the money back.  The above items are standard.

6.  Don’t forget to get legal counsel for the fine points and to get the absolute best money for your lease.  I recommend you hire an experience oil and gas lease negotiator.

  • Pit-falls  you need to beware of:  Forced Pooling, Unitization and Surface damage clauses.  Delay Rentals is a separate subject.

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