How to negotiate an oil and gas lease

1. Understand the Importance of the Lease

Oil and gas leases are generational contracts that can last for decades. Every clause in the lease can impact your property rights, income, and long-term interests. It is essential to approach the negotiation with diligence and a clear understanding of your goals.

2. Know what you own. Research Before Negotiating

• Property Research: Gather all relevant documents, including deeds, surveys, and title histories. Verify your ownership percentage and acreage. What are the gross acres of the land vs the net oil and gas acres you own. The overall size of the tract you own is your gross acreage. Your net acreage is calculated as your percentage ownership in your gross acreage. For example, if you own half of the minerals in a standard quarter section, you will own 160.00 gross acres and 80.00 net acres. However, if you own all the north half of the section, you will own 320.00 gross acres and 320.00 net acres.
• Operator Research: Investigate the operator or lessee. Check their reputation, financial stability, and track record. Search online and ask contacts in the industry. Check the Railroad Commission and find out what kind of operator they are. Get on https://www.mineralrightsforum.com/ and find out what kind of relationship other mineral owners are having with this operator. Reach out to NARO office to see if we’ve had any complaints.
• Market Research: Understand the royalty rates, lease bonus amounts, and terms being offered to other mineral owners in your area. Contact adjacent mineral owners and inquire about their agreements. Abstractors, the County Clerk, County Commissioners, and NARO are resources you can reach out to.

3. Key Lease Clauses to Negotiate

• Granting Clause: Grants the Lessee the right to enter upon the surface of the land for the purpose of exploring and producing oil, gas and other minerals. Provides legal description and sets out the number of acres included in the legal description. Specifies the substances (e.g., oil, gas, lithium) the company can explore and produce. In an oil and gas lease, this usually includes oil, gas, condensate, and associated hydrocarbons. But many older leases never mention lithium, brine, saline water, or “other minerals.” Some of the newer leases for lithium might mention “incidental oil” that may be extracted.
• Royalty Clause: Oil and gas royalties are often calculated as a percentage of the value of the resources produced. Negotiate for the highest possible royalty rate (commonly 20–25% for modern oil and gas leases).
• Make sure your lease provides for a royalty based on gross proceeds. Avoid post-production expenses with a no deductions clause. The detailed provisions of the lease, such as the royalty percentage, damage clauses, Pugh clauses, and all the other detailed provisions most privy mineral owners add to their leases are not of public record. The most important of these is the royalty percentage and whether post-production costs may be deducted against the royalty.
• Habendum Clause: Limit the primary term to three years or less and avoid options to extend. Avoid primary terms longer than 3 years and avoid options to extend, also called “kickers”. Options to extend are just that, options. They are not an obligation for the Lessee and in most instances, options are to the benefit of the Lessee and not to you, the Lessor. In the event of an option, work to limit the option to one year, no more than two. Negotiate for an option bonus at 150%-200% of the original bonus paid.
• Pooling Clause: Include a Pugh Clause to ensure non-producing portions of your land are released from the lease after the primary term. A Pugh Clause is a provision included in oil and gas leases that protects the landowner (lessor) from having their entire property tied up by a lessee (oil and gas company) for an extended period, even if production is only happening on a small portion of the land.
• Surface Use Clause: Protect your land by negotiating provisions for surface damages, setbacks, and environmental protections. If you own the surface, ensure the lease includes terms for compensation for surface use.
• Shut-In Royalty Clause: Limit the time a shut-in royalty can be used to maintain the lease (e.g., two years) and negotiate for a higher payment per acre.
• Assignment Clause: Include notice and consent provisions to ensure you are informed and have a say if the lease is sold or assigned to another operator.

4. Additional Provisions to Include

• Depth Severance Clause: Release specific geological formations or depth rights back to the landowner after the primary term expires. For example, a mineral owner may lease just a specific formation, or include a “Pugh” clause that states at the end of the lease term (say five years) only the formation(s) drilled will be held subject to the lease and all other formations are released backed to the mineral owner.
• Indemnification Clause: Protect yourself from liability for damages caused by the lessee's operations.
• Environmental Monitoring: Include clauses for environmental testing and liability protections.
• Audit Rights: Ensure you can verify production volumes and pricing to avoid underpayment of royalties.

5. Avoid Common Pitfalls

• Bank Drafts: Request a check for the lease bonus payment instead of a bank draft, which can delay payment. Hold on to your original, signed lease until payment is received. If providing a copy of the signed lease to the Lessee via email, fax or mail to initiate the payment process, be sure to first make a copy of the lease and stamp or write “COPY” on each page of the copied lease before providing to the Lessee. This prevents the lease copy from being recorded prior to you receiving your lease bonus payment.
• Warranty Provisions: Remove warranty clauses or negotiate for a "Special Warranty" to limit your liability for title issues prior to your ownership.
• Top Lease Provisions: If approached for a top lease, ensure it includes terms that protect you from legal conflicts between the base lessee and the top lessee.

6. Seek Professional Assistance

• Oil and Gas Attorney: Consult an experienced attorney to review the lease and ensure the language is favorable to you, who is experienced in the area where your land is located.
• Landman: A landman can help with title searches and provide insights into your ownership.
• Petroleum Engineer or Geologist: These professionals can assist with appraisals and understanding the value of your mineral interests.