How to buy an oil lease

how to buy an oil lease

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Review the meaning of a "fee simple estate." In a fee simple estate, the owner has the right to sell, lease, gift or bequeath oil and gas rights to an individual or group.

Lease to a mining company with minimal rights. Sometimes mining companies want to test (drill) the quality of the oil and gas before buying a property. If they want the property they will make an offer. If not, at least you have the leasing rights. Unless you own a large block of land, holding out will not increase the price.

Review a standard oil and gas lease agreement. A lease gives the mining company the right to enter the property, conduct tests and determine if it wants to continue to mine the property. While a lease is only good for a certain amount of time, it provides enough time for the mining company to appraise the land for oil and gas.

Negotiate a high royalty payment. When minerals are produced, the owner is paid a share of the production income. This amount must be specified in the lease agreement.

The number is usually based on tonnage or production value. Other terms are possible. The average rate is 13% or an eighth of the amount sold at the pump. Aim for 25 percent or more.

Negotiate a high signing bonus if your royalties aren't as high as you would like. This is an up-front payment to the owner. The owner keeps this amount regardless of success in drilling.

Check with state and local laws on the ability to drill for for oil and gas in your area. Some states have regulations governing the right to fair sharing of oil and gas royalties. This is called "unitization." Ask your attorney for a boilerplate leasing agreement to be used during negotiations. It should have a clause about unitization in your state.

Hire an attorney to help prepare the contract. In most cases the lessee is the one who prepares the contract for signature. Take this to your attorney for review and revisions. Lessees will often accept significant revisions.

Review a sample lease (preferably from your attorney) and negotiation checklist before giving your final signature. See Resources for an example.


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