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Over the years, the oil and gas industry has proven to be a highly lucrative business. In fact, it is a multi-billion dollar sector. Even though this is true, a significant portion of the profit goes to oil companies as opposed to mineral owners. Primarily, this is because many of the mineral owners rush into agreements with such companies before asking themselves how do oil and gas leases work?
Inadequate geological training and understanding of the potential held by the minerals serve as one of the reasons that mineral owners enter into leases. As a matter of fact, most do not have the multi-million budget to undertake the exploration, extraction, distribution and selling of the oil and gas. On the contrary, oil corporations have the adequate funding and experts with knowledge about oil and gas exploration.
What is an Oil and Gas Lease?
An oil and gas lease is an agreement or contract between a lessor, mineral owner, and a lessee, an oil company. It grants the rights of the mineral owner to an oil company for exploration as well as the development of gas and oil reserves.
Oil companies find areas that are likely to have gas or oil and they negotiate with the landowners. This is mainly to lease the landowner’s mineral rights, which give them permission to explore, extract and trade the minerals found beneath the land. This happens in exchange for compensation such as:
The bonus is one of the two types of compensation that a mineral rights owner receives from the lessee. This payment is made on a per acreage basis. A bonus is a one-time payment that is done during the time of lease signing. This may be the only compensation that a lessor gets.
This is the second form of compensation whereby a land owner gets a percentage of the money generated from the oil and gas. The royalty is dependent upon the company finding oil and gas in economic quantities. The percentage of the royalty may vary depending on the negotiation skills of the lessor or mineral owner. If the oil company finds no gas or oil or minimal economic quantities, then it does away with the prospect. This translates to the expiration of the contract whereby the mineral rights revert to the landowner.
Main Clauses in an Oil and Gas Lease
• The Date Clause: An oil and gas lease must be dated. This clause does exactly that and establishes the primary period of the lease.
• The parties Clause: This section lists all the names of the individuals bound by the lease or lessors.
• The Dry Hole, Cessation and Continuing Drilling Clause: It requires a lessee to commence drilling another well during a stipulated duration ,especially upon encountering a dry well. Drilling work has to continue until the lessee finds a well with gas and oil in economic quantities.
• The Granting Clause: It grants the lessee or oil company the rights to establish or erect the oil and gas reserves. Some of the rights detailed in this clause include the right to develop roads, erect power lines and build tanks
• The Consideration Clause: It details that the mineral owner or lessor will receive a particular amount of money for accepting the lease. This amount of money is given in addition to other compensation packages such as bonus and royalty.
• Surrender Clause: This particular section allows a lessee to terminate any section or the whole lease. As such, the lessee is exempted from the obligations for the part of the surrendered lease. However, it does not relieve the lessee from certain obligations like equipment removal and restoring the surface.
How Long do Oil and Gas Leases Last?
Oil and gas leases last for quite a long time depending on the production. In this case, the duration of such leases includes the:
• Primary Term
It is the initial duration during which a well is drilled. In case the well is not drilled during this period, then the oil and gas lease may expire.
• Secondary Term
This duration kicks in if no results are attained during the primary term. It involves an indefinite period. Most oil and gas leases specify that a well has to be drilled within the primary term. After the well has been drilled, the secondary term sets in and continues until the well runs dry. Hence, the lease is in effect as long as there is production.
Keep in mind that a lease is a legal agreement and ought to be looked over by a professional or attorney who has experience in handling oil and gas leases. This ensures that all your interests are safeguarded and you can comfortably g how do oil and gas leases work?