Leases and leasing
In most cases the expense of exploring for and developing oil and gas resources by the individual mineral rights owner is prohibitive. A single well may cost over a million dollars for drilling and well-completion operations. As a result, most exploration and development is undertaken by companies or individuals having sufficient capital to finance such ventures.
Before companies can begin an exploration program, they must obtain valid leases to the oil and gas rights within the area in which they wish to explore. This activity is called leasing.
Leasing is conducted by oil-company landmen or by lease brokers. An oil-company landman is a person in the employ of the company who is engaged in the negotiating of lease agreements with mineral-rights owners. A lease broker is a person or a company which negotiates lease agreements on behalf of a company or individual. The lease broker may acquire leases in the name of the oil company or may acquire them in his/her own name and later assign them to the company that has retained his/her services.An oil and gas lease agreement is a legal instrument which provides for the granting by the mineral rights owner (lessor) to the oil company (lessee) the right to explore for and develop the oil and gas resources which may underlie the area described in the lease. A lease agreement contains a number of stipulations usually including but not necessarily limited to
- A legal description of the area included in the
lease and the number of acres involved.
- An effective date of the lease agreement and the anniversary date for the lease on or before which annual lease rental payments must be paid to keep the lease in force.
- A statement as to the primary term of the lease. This may be of any mutually agreed to period of time, but is usually for five or 10 years.
- A provision for the payment of annual lease rentals by the lessee to the lessor. These rentals are paid in order to maintain the lease in effect throughout the primary term and are paid in lieu of royalty payments. In the event that oil or gas production is found, the lease will remain in effect so long as production continues, even beyond the primary term of the lease.
- A royalty clause, which indicates the share of oil and gas production that is reserved to the mineral rights owner. Royalty is usually indicated as a fraction or percentage of the oil or gas that is produced. It may be any amount mutually agreed to between the lessor and the lessee but is usually 1/8 (12 1/2%) and is stated on the lease. Royalty may be received in kind, that is, the lessor may take physical possession of the oil or gas, but usually the oil or gas is sold to a refiner and the lessor receives payment for his/her share.
Placed online April 2001
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