There are a number of issues that you should pay special attention to when negotiating an oil and gas lease. First are the basic terms of the lease. The fact of the matter is that the negotiation is governed by supply and demand. The more important your oil and gas lease is to the oil company, the better terms you can negotiate.
Western Mineral Consultants owns minerals in over 130 counties in 16 states. When contacted for oil and gas leasing, the first thing we do is research the oil and gas activity in the area. This can be done by subscribing to an online service like DrillingInfo, or learning to use the state oil and gas organization’s website for the state your minerals are located in, or checking oil and gas related sites like MineralWise and following their county blogs.
Western Mineral Consultants utilizes all of the above to determine what the market will bear in our mineral rights negotiations. In areas that are very active with high rig counts and courthouses full of landmen, oil and gas leasing bonuses can be as high as several thousand dollars per acre, royalties as high as 25%.
However, in areas with little to no activity you may accept an offer in the tens of dollars per acre, 12.5% royalty and up to ten year terms with renewal options. It’s important to have as much knowledge as possible of what you can negotiate and never be afraid to ask for anything. You may be amazed as to what you are able to negotiate. We would advise you to never accept the first deal offered. You can almost always improve on the first offer. We also advise you to never accept a lease proposal that has an option period included. An example would be a 3 year lease with a 3 year option. The problem with the option period is that it favors the oil pay to extend the lease after the primary term ends and they will be doing so at a less than market rate. If the activity subsides, then they will simply not pay off the option price and the lease will expire. Either way, you are better off if you control the negotiation.
Unless you are intimately familiar with the various lease clauses like Pugh clauses, market rate clauses, or damage clauses, hire a landman or Attorney to help you protect your asset.