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4 Tips for Negotiating an Oil and Gas Lease

Author: Greg Frazier, Senior Vice President, Director, Oil and Gas Management 01/20/2022

When someone owns, purchases, or inherits a property, they may also receive mineral rights—or ownership to the naturally occurring solids, liquids, and gases beneath the land’s surface. In some cases, mineral rights owners can lease access to the mineral deposits to oil and gas companies.

Negotiating an oil and gas lease will require some research upfront. If you’re a landowner interested in working with an oil and gas company, you should explore their history and experience. You’ll want to work with a reputable company that works in your best interests, holds a high standard, and maintains insurance.

You may also want to find a bank that can provide full-service oil and gas management. Bankers who specialize in oil and gas management can guide you through each element of the negotiation process to help ensure you get the most out of your agreement.

The following are some of the key terms you’ll want to negotiate in your oil and gas lease.

Lease Bonus

The lease bonus is a single payment that the oil and gas company provides to the lessor when the agreement is signed. The amount will depend on the quality and quantity of the minerals being leased. If you’re working with third parties to negotiate the lease, including an experienced mineral manager, they can help you maximize the lease bonus.

Length of Lease

Your oil and gas lease should give the oil and gas company a specific amount of time to drill a well. Depending on what the agreement aims to accomplish, the timeline could range from months to years.

Royalty Clause

The royalty clause will dictate how much you earn from your minerals. This is usually a percentage of the company’s sales from the oil and gas extracted from your land. You’ll also want to discuss other language within the royalty clause to make sure it prohibits certain expenses or fees from being deducted out of your royalty.

Depth Clause

The lease you negotiate should specify how far beneath the surface you’ll allow the oil and gas company to drill. Understanding what the company is targeting and setting depth parameters can help ensure they don’t take more than intended. This also leaves the door open for further negotiation in the future.

It’s important that landowners who acquire a parcel of land know what’s specified in the sale and allowed by their state prior to negotiating an oil and gas lease. For example, in Texas, the land’s surface and the minerals underneath it can be owned by two separate entities or individuals.

Becoming familiar with certain elements of your oil and gas lease will help ensure you’re properly paid for the natural resources you own. PlainsCapital Bank can help mineral rights owners get the most out of their property while protecting their assets. Call 866.762.8392 or visit PlainsCapital’s oil and gas management page to learn more.

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