Modern Exploration, Inc.
4900 Texoma Pkwy
Sherman, Texas 75090

A Landowner's Guide to Oil and Gas Leasing

Introduction

Oil and gas are valuable commodities. Their presence beneath your land could mean extra income if you choose to grant a lease to an exploration and production company. Exploration companies employ or contract with a professional called a "Landman" to acquire leases of mineral rights to land with potential reserves of oil and gas.

Not all Landman work for exploration companies. A Landman who has asked you to sign a lease that allows a company to drill on your property may have already approached you.

If you are approached, consider the offer, but remember to lease to a company that intends to drill a well. Some companies will "turn" (buying then reselling) a lease. Turning a lease will only make money for the companies. The way you make money is when a significant well is drilled on your lease. In any event make sure the lease protects your interests.

What is a Lease?

A lease is a legal document or contract between a landowner (lessor) and a company or individual (lessee) granting exploration and development rights to subsurface oil and gas deposits. Companies will usually present you with a preprinted or standard lease.

Review it very carefully.  Negotiate changes to meet your needs and protect your interests before signing. Get all agreements and conditions in writing. Also, remember that you are granting a right to others, which may be viewed as an encumbrance on the property.


Key Components of a Lease

Cash Bonus - This is an up-front payment or bonus, which is generally computed on a per acre basis for signing the lease. While this money is important it is not as important as choosing a company that can drill you a productive well. A monthly check each month from royalties can be enormous and steady.

Primary Term - The number of years that a lease is in effect. It can be from one to ten years or more.

Secondary Term - The duration of a lease is extended beyond the primary term if a producing well is drilled on the lease or if the lease is "pooled" with other leases to form a "unit" for a producing well. The lease is "held by production" extending its duration and expires when production ceases.

Royalty - Your share of the production from beneath your property. This will be referred to in the lease as a fraction - usually 1/8 of the value of the oil and/or gas produced and sold.

Shut-in Royalty - Payment in lieu of a production royalty. Paid when a well is "shut-in" (capable of production, but not producing) for maintenance or other reasons.

Termination - Occurs when the primary term expires or when economic production ceases during the secondary term.

Drilling a Well

Drilling will typically last approximately two to four weeks, depending upon many factors, including the depth of the well and the time of year. Deep gas well drilling may last two months.

Once an oil and gas company determines where to locate a proposed well, the company must obtain appropriate permits. Contractors will construct the access road and drilling pad to accommodate the drilling rig and other equipment.

If the well is capable of production, most of the drilling site will be reclaimed within 45 days, depending on weather. It is important to choose a company that has a good reputation with landowners. Choose a company that has a good environmental record.

Wellhead assemblies, meters and various tanks will remain on-site, near the well location, for the life of the well. If the well is not completed or is no longer capable of production, state regulations require that a plugging permit be obtained and that the well be plugged and the site reclaimed in accordance with the regulations.

Remember

The lease is a legal document and should be reviewed. Leasing provides you with revenues, but you should also make sure your interests and property are protected.

 

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