Warren’s Tips on Oil and Gas Leases (Haynesville Shale)
- Use your own lease addendum that states that all items in the addendum supersede the original lease.
- Use an attorney that works on a reasonable hourly basis – no percentages.
- Find out who the lease is with; no middle men. Everyone seems to want to “flip” a lease to the next guy, leaving you with less every time. Even oil companies will flip to the final oil company that will actually drill. This company may then sell the whole production to the next bigger fish.
- Vertical (lease only one strata) and horizontal (production in a pooled unit will not hold that portion of the lease not included in the unit) Pugh clauses; tie the lease to one area, e.g., Cotton Valley only or Haynesville Shale only. Designate depths – e.g., “between 11,000 and 14,000 feet only.”
- No drill clause unless you want to allow drilling on the property; then, negotiate for surface damages and require removal of all structures and equipment after lease expires; restore land to original, pre-drilling condition as is possible
- Get market rate for paid-up bonus and royalty
- Delay Rental – if drilling operations are not commenced within a year, the lease will terminate or another agreed upon sum will be paid. Delay rentals must be paid on each subsequent anniversary date of the lease’s primary term if drilling operations have not yet begun by that date. Use the “or” clause in the delay rental, not the “unless” clause. Drill, or pay or surrender the lease (uncommon in North Louisiana).
- At the end of the Primary Term or upon the cessation of the continuous development of the leased premises, whichever is later, the lease shall terminate as to all lands and depths covered within the lease, except as to those lands and depths located within a unit assigned to a producing well producing oil or gas in paying quantities.
- Require a shut-in royalty to be paid annually while a producing well is “shut-in” or gas is not being sold. Shut-in royalties are to be paid in the primary and secondary terms of the lease. Escalate the shut-in royalty for each year the well is shut in. Limit the shut-in period to two years max.
- Get paid for seismic testing, no automatic consent; get paid a price per acre
- Lease includes oil and gas only, no other minerals such as coal, lignite or uranium
- No disposal of saltwater on site or underground wells
- Provide no warranty in Lease, including No requirement to return bonus; require that gas company assume all risk and warranty the lease; assume no liability for accidents on property; in the event of default on the part of the Lessee in the performance of any of the provisions of the lease and there is a need to hire an attorney to enforce such provisions, the lessee agrees to pay lessor all enforcement costs, including all attorney fees.
- Determine if the lease can be assigned; assigned leases do not release primary lessee from responsibility
- Three year maximum lease with no options for renewal
- No bank drafts for bonus payment or surface damage payments. No bank drafts.
- Get price at well head or market – WHICHEVER IS HIGHEST!
- Royalty payments shall not include any deductions for drilling and production costs, post production costs, marketing costs, operating costs, distribution costs, compression costs, transportation costs, separation costs, salt water disposal costs, dehydration costs or any other costs.
- Production is defined as a gas/oil producing well
- Other Considerations—1) Be careful not to sign a “paid up royalty” lease. This would be a lease that states that with your bonus you are also giving up future royalties. A high dollar bonus lease might include this. 2) Be careful not to sign a lease that states a certain percentage royalty but only for a short period, e.g., the primary term of three years. 3) Be careful not to cash checks sent to you from companies after you have signed a lease – recently a lady who had a 3-year lease was sent a $500 check from another company. Her attorney stated that if she cashed that check she would be handing over future minerals/royalties to the second company. 4) Be careful of the company that sends you a contract that says to average three months of royalty checks and then multiply that number by 66 to arrive at a number the company will pay you to hand over future mineral rights to them. 5) Shady deals are only limited by the imagination of the shady dealer.
If you have a legal question about an oil and gas leases, we invite you to contact or call 318-869-2900 to schedule a consultation with attorney G. Warren Thornell to discuss your legal concerns.