Oil and Gas Leases
Oil and gas leases are specific types of agreements that grant the lessee the right to explore, drill, and produce oil and gas from a property. These leases are vital instruments in the energy industry, allowing companies to access and develop oil and gas reserves while providing revenue to the landowners or mineral rights holders.
Some important lease components:
Royalty Payments: Ongoing payments based on a percentage of the revenue generated from the production and sale of oil and gas. Royalty rates can vary but typically range from 12.5% to 25%.
Lease Term: The duration of the lease, often divided into a primary term and a secondary term. The primary term is the initial period during which the lessee must begin exploration or production to maintain the lease. If production starts, the lease enters the secondary term, which lasts as long as production continues.
Drilling Obligations: Specific requirements the lessee must meet regarding the commencement and continuation of drilling operations. These obligations ensure that the lessee actively pursues resource extraction.
Surface Use Agreement: Provisions outlining how the surface of the land will be used and restored. This agreement is crucial for minimizing the environmental impact and addressing any concerns of the surface rights owner.
Other Key Concepts in Oil and Gas Leases
Rule of Capture: The rule of capture is a legal doctrine that gives the landowner the right to extract, or “capture”, resources beneath their land without violating the rights of neighboring landowners, even if the resources have migrated across property boundaries.
Base Minimum (Delay Rental Payments): In some cases, a drilling company may decide not to drill immediately after signing a lease. To keep the lease active, they pay a minimum payment to the mineral rights owner. These payments compensate the owner for the delay and maintain the company’s right to drill in the future.
Unitization: Unitization is the practice of combining multiple properties to form a single drilling unit. This approach optimizes resource extraction by reducing redundant drilling and ensuring more efficient use of resources. Unitization agreements often include provisions for sharing production revenue among all participating landowners proportionately based on their acreage contribution.
Last updated