A seismic survey is often an Ohio landowner’s first step in determining if his or her land has oil and gas underneath it. In a seismic survey, reflected sound waves are used to produce a CAT scan of the Earth’s subsurface. If the survey shows you may have oil or natural gas beneath your land, you may be approached about leasing your mineral rights.
If you are the owner of the mineral rights and you are thinking about signing an oil and gas lease, remember you have several options when it comes to signing a formal lease with an oil or gas company.
You can negotiate for the right to make water wells out of nonproductive wells. You can negotiate the types of roads that will be built on your property and the kind of gates that will be built to gain access to your property as well as the right to use water on the property during the drilling.
You may also add clauses to the contract dealing with future damage to your property and compensation for loss of use of land for grazing or growing crops.
Many of these topics are typically covered in a habendum clause which is the opening paragraph of the lease. It grants the lease and outlines rights the lessee will have to drill, place tanks and equipment, do seismic testing, store gas, access roads, or operate an injection well. This clause should be carefully reviewed by an experienced oil and gas attorney.
Negotiate a Favorable Royalty Agreement
A royalty is a landowner’s right to receive payments based on the production of a gas and oil well on their property. The standard royalty is one-eighth or 12.5% of gross production, but you may not be able to negotiate that. In some cases, you may get a higher percentage. The lease should be reviewed to determine how the royalty is being calculated (net sales or gross production).
You might decide to negotiate an oil and gas lease that includes a larger upfront payment for the lease with less of a percentage of oil revenue. Thus, if oil is not found, or if production is low, the landowner may still make a profit.
It is also recommended that you lease your land only to a certain depth to keep future options open. If it’s a small company with which you are negotiating a lease, and they are planning to drill to a depth of 5,000 feet, you could lease the depth beyond that to another company if you have this provision in your contract. Otherwise, you give up that right for many years to a company that does not plan to drill that deep.
The latter is another instance of where you could save millions of dollars over the years by consulting with a qualified oil and gas attorney to help negotiate the deal.
Learn Everything You Can
Before you sign a lease, think about what will happen after you sign and how your land will be affected in the future.
If you know where there are active wells on neighboring land, ask those landowners how things have been going since they signed a lease. Visit your library or go online and learn the basics about how wells are drilled and how pipelines are installed.
You should be familiar with phrases like “primary term,” “secondary term,” “delay rental,” “shut in royalty” and “pooling” as well as several others terms such as an “indemnification clause” which holds the landowner harmless for any damages that occur as a result of the lessee’s operations on the property such as damage to a water well.
Although damage to a water well is not common, the indemnification provision should be included.
Don’t Try to Negotiate on Your Own
Unless a landowner is in the oil and gas business and is highly familiar with all the ramifications of drilling a well, he is likely unaware of everything he has to know to sign a lease that will have a chance of making him some profit.
The oil and gas attorneys at Slater & Zurz LLP can assist with lease negotiations which is a very important phase of oil and gas well development. Contact us at 1-888-534-4850 with your questions about the lease process or send us a website message to schedule a free consultation.