Oil and Gas Lease Negotiating-Top Ten Things to Do

Upon receiving an oil and gas lease here are some beneficial actions

Every day across America, mineral owners are contacted with an oil and gas lease proposal regarding their oil and gas mineral interests. Unfortunately many of them don’t do their homework and miss available opportunities. However, those willing to do a little homework can maximize the benefits from their mineral ownership by employing these tips.

Determine How Significant the Oil and Gas Lease is to You

Remember, only you know how significant this deal is for you. This fact alone will guide much of your thought and action. If the range of economic impact is small (possibly insignificant) consider the opportunity cost of your time. On the other hand, the economic impact of the oil and gas lease may be large enough for you to devote substantial time and brain power to the transaction.

Touch Base With Your Neighbors

There is power in numbers. When an oil company is leasing in an area, this is not the time for you to be a Secret Sam. Share and share alike with your neighbors. Talk about which companies have contacted you, the specific person, the terms they are offering, the timetables being proposed etc. Knowledge is power.

Determine if There are Other Family Members Who Have Been Contacted

Aunt Edna, Uncle Ernie, Cousin Clem – call them all. Make sure you know which other family members are in the mix. To the extent possible, speak to the oil company as one voice. All else being equal, the larger the mineral interest, the more likely you’ll be able to negotiate a better deal.

Determine Exactly “Who” You’re Talking To

The entity or individual who initially contacts you could be one of various stripes. Ask questions to ascertain which of these you’re dealing with:

• A contract leasing agent/broker – These are usually independent contractors working on behalf of either an oil company who intends to drill, or for a larger land brokerage firm who has been hired by the oil company. They often have incentives (as you might guess) to get the best oil and gas lease for the oil company.

• An employee of the oil company- sometimes an oil company will have “in house” landmen pursuing leases.

• An entrepreneur/middleman – at times, a landman will be working for their own account, taking leases in their own name (or their own company’s name) with the intention of re-selling (flipping) the lease to another entity, likely an oil company who actually has the capacity and intention to drill.

If You Have Multiple Tracts of Land, Demand Separate Oil and Gas Leases for Separate Tracts

Simply put, this minimizes the chance of there being problems down the road. Development of an oil or gas field is a dynamic process that unfolds over time – as in years. By matching one oil and gas lease to each contiguous tract, the issue of whether a tract is held by production from another tract is all but eliminated.

Gather Your Lease Paperwork

Gather any and all supporting documents related to your ownership (both mineral and surface). This may include: deeds, deeds of trust, maps, wills, previous leases, mineral or royalty conveyances, easements, ratifications etc. Take time to review these prior to entering into substantive talks. You’ll save time and be more prepared to deal with upcoming questions.

Google the Parties Involved

Perform an internet search on items and individuals associated with the deal. You already have information with which to start…

• The person’s name who contacted you

• The oil company’s name

• The local newspaper near the property (articles on recent drilling activity etc.)

• The name of the geologic formation to be drilled (ask the landman what it is)

Research Current Wells in the Vicinity

All wells are not created equally! The internet offers a relatively easy way to get a feel for any current wells in the area of interest. Go to the website of the State Regulatory Agency which oversees oil and gas activity in the appropriate state. Use the search function to search for things like currently producing wells, the names of Operators in the area, recent drilling permits etc. Be a snoop.

Be Nice

Good manners are never out of fashion. Courtesy and integrity always count. Offer to buy (or make) the coffee and cookies should you meet personally. If in fact you’d like a well drilled on your minerals so that you enjoy economic gain, then remember the end game – you’ll ultimately need to arrive at a lease with terms suitable to all parties. You’ll likely get there with more money in your pocket if you’re nice along the way.

Consider Whether You’d Like to Create a New Business Entity

IF the size of the deal is significant enough, and IF there are financial planning or succession implications to the receipt of income, now is the time to think about these issues. Once the lease is signed, the oil company will be issuing bonus payments and future royalty payments to the entity or name listed on the lease. If you desire otherwise, you’ll need to transfer mineral ownership into a new entity BEFORE entering into a lease.