Oil and Gas Lease Negotiating - Top 10 Things Not to Do

Common mistakes mineral owners make in oil and gas lease negotiation

Every day across America, mineral owners are contacted with oil and gas lease proposals regarding their oil and gas mineral interests. Unfortunately many of them don’t do their homework and miss available upside. Along with a sister article titled Oil Lease Negotiating - Top 10 Things To Do, we present here things NOT to do. Hopefully you won’t find your actions among these.

Don’t Jump at the Site of an Oil and Gas Lease!

Don’t immediately pick up the phone to the leasing agent, gushing with emotion that you’ve received an oil and gas lease in the mail. If there’s ever a signal that says you’re an early signer (and likely not getting the best terms), it’s that you just couldn’t wait to start talking.

Don’t Rush to Hire a Lawyer

While you may in fact want to get an attorney involved later during the process, there are many other things you can do to benefit yourself in the mean time. Immediately hiring a lawyer upon receipt of an oil or gas lease only starts his fees sooner, and will ultimately cost you more than if you had waited. In fact, the lawyer, if he’s worth his salt, should first ask you questions that you’ll need to find the answers to yourself. You can find many of these issues discussed here at MineralWeb.com.

Don’t Sign the Oil or Gas Lease

Most documents within an oil and gas lease proposal package (leases, ratifications, bank drafts, etc.) are legally binding documents. Until the deal is thoroughly discussed, negotiated, and understood, there’s no need for you to sign anything.

Don’t Focus on the Lease Price Alone

Of course the economic implications are important, but this is far from the only important aspect of an oil and gas mineral lease. Everything is negotiable. In the case where you own surface rights along with mineral rights, the terms related to surface use can be quite important, possibly more important than lease bonus and royalty percentage.

Don’t Start Spending Money You Don’t Yet Have

This is called common sense. Until the check clears the bank, you haven’t made a dime. Furthermore, just because the drilling rig has shown up does not mean that a commercially viable well is around the corner. Maybe, but no guarantees. There are plenty of dry holes around.

Don’t Respond That You’re Not Interested

Even if you’re the rare person who couldn’t care less about the economic benefit, it’s in your best interest to learn about what is happening in the area. You may in fact ultimately get force pooled, which will result in certified mail and phone calls to deal with anyway.

Don’t Warrant the Oil and Gas Lease

The first draft of an oil and gas lease presented to you likely states that you warrant and defend the chain of title to your minerals. Simply stated, delete it. Don’t warrant (guarantee) anything.

Don’t Spout Off

As in, don’t say things verbally that you’re not willing to stand on. Absolute statements like “I won’t take anything less than $5,000 per acre” are usually of little value, and in fact may hurt you. If ever you decide to back away from your statement, you’ve lost credibility, which will only minimize your negotiating power. Absolute statements in negotiating are typically made by rookies.

Don’t Lease Multiple Non-contiguous Tracts on One Lease Form

Simply put, this minimizes the chance of 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 or gas lease to each contiguous tract, the issue of whether a tract is held by production from another tract is all but eliminated.

Don’t Allow Unrestricted Use of Fresh Water

The first draft of almost all oil and gas leases allows for unrestricted use of fresh water for operations related to the drilling and completion of a well. This issue may or may not be applicable in your specific case, but it is certainly worth considering.