The Ultimate Guide to Oil and Gas Drilling Investment Leases

The United States oil and gas industry is multi-billion-dollar market that operates fundamentally on the ability to obtain access to subsurface minerals for the drilling of wells and the extraction of oil and gas minerals. But in order for oil companies to obtain access to the minerals beneath land surfaces, there must be an oil and gas lease agreement in place.

How these agreements are formed, negotiated and executed can be a bit complicated. This guide will help to teach you about the different types of oil and gas lease agreements, the process of oil and gas leases, as well as tips and guidelines to help property owners interested in negotiating and leasing their own mineral rights.

There are enormous benefits to investing in oil and gas leases, or leasing your mineral rights. Not only can it be financially lucrative upfront, but it can establish a long-term revenue stream for decades to come.

While the financial benefits are extremely appealing to many investors, individuals and families, its important to know the ins and outs of negotiating an oil and gas lease agreement ahead of time, so you can be reassured youll be getting a fair deal.

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What Is an Oil and Gas Investment Lease?

When minerals are found, or thought to be present under the surface of certain pieces of land or properties, they can be extracted and recovered by oil and gas companies pending an investment agreement with the mineral rights owner. In certain circumstances, however, there is a difference between the mineral rights owner and the surface landowner, which determines the type of oil and gas lease agreement in question.

The type of oil drilling investment lease agreement is determined by the entities involved, such as surface landowners and mineral rights owners on that particular piece of land. For oil and gas companies, and for oil drilling investors, its important they understand which type of oil and gas lease agreement will be in place.

In general, there are three types of oil and gas drilling investment leases. These include the following scenarios:

Public mineral leases , whereby the surface land is owned publicly, and the mineral rights are owned by the federal government.

, whereby the surface land is owned publicly, and the mineral rights are owned by the federal government. Public mineral leases , whereby the surface land is owned privately, but the mineral rights are owned by the federal government.

, whereby the surface land is owned privately, but the mineral rights are owned by the federal government. Private mineral leases, whereby the both the surface land and the mineral rights are owned by the private landowner.

Whenever the mineral rights belong to the federal government, whether its under public or private land surfaces, the oil and gas company forms a public mineral lease agreement. The federal division known as the Bureau of Land Management manages this public lease agreement with the oil and gas drilling investors.

When the surface land is owned privately, but the mineral rights are owned and retained by the federal government, then the landowners are referred to as surface owners only. If a lease agreement is formed under this scenario, it is called a Split Estate. It is sometimes possible that the surface owner isnt aware that there is a mineral lease agreement in place involving their land. Its also possible they may not even realize that a company will use their land to access the below-surface minerals.

Public Oil and Gas Lease Investments

As an investor, you may qualify to hold an oil and gas investment lease issued publicly by the Bureau of Land Management (BLM). The BLM has certain criteria that an individual must meet in order to qualify to hold a public oil and gas lease, including age of majority, citizenship and more.

These public oil and gas drilling investment leases can be obtained in two ways:

Competitive lease agreements

Non-competitive lease agreements

Competitive lease agreements are auctioned off orally. Auctions are held at least quarterly as land becomes available. Each BLM State Office issues auction notices in advance. Successful bidders must meet specific requirements, including completing a lease bid form, paying administrative fees and paying for the first year of the lease upfront.

Non-competitive lease agreements are offered by the BLM after a two-year period of unsuccessful competitive bidding. To obtain a non-competitive lease agreement, you must also meet certain requirements such as submitting your offer on a BLM-approved form, paying an administrative fee and paying for the first year of the lease upfront. The BLM considers non-competitive lease offers in order of priority based on who filed first.

There are several requirements, terms and conditions involved in obtaining and holding a public oil and natural gas drilling investment lease. For more information about royalties, lease transferring, expiration dates and other terms and conditions, visit the Bureau of Land Managements Oil and Gas Leasing Program.

Private Oil and Gas Lease Agreement Investments

Private oil and gas drilling investment leases are agreements between two private parties for the purpose of extracting and recovering privately owned minerals from privately owned land. The first party is called the lessor  they are the private landowner whose property contains the oil, gas or minerals in question. The mineral rights belong exclusively to them. The second party is called the lessee, and they are the oil and gas company or private investor that wants to lease the land and mineral rights from the lessor in order to drill for the purposes of extracting oil and gas minerals.

Essentially, the landowner is agreeing to grant access to the oil company to use their land for oil and gas drilling and extraction. In exchange, the company pays the landowner some combination of compensation, like a signing bonus and ongoing royalties on the value of minerals extracted and sold. This is why well-established and negotiated mineral lease agreements can be very profitable for the landowner. If it moves forward, the partnership can provide a steady stream of income over a long period of time.

Stages of Mineral Rights Leasing for Private Owners

Ownership: Your ownership of your mineral property includes the exact description of your legal ownership, including how many mineral acres you own.

Leasing: The structure of the agreement between the lessee and the lessor, including a bonus payment and royalty details, the term of the agreement and other terms and conditions.

Division Order: The division order of the agreement outlines how interest and revenues will be divided among the parties involved. This can include multiple royalty owners in certain situations where royalties are being shared by multiple parties.

Royalty Check: Royalty checks or stubs are what the mineral rights owners receive, usually on a monthly basis. The format of the stub or document will differ between each agreement. It will generally include information like volume of product sold, unit price, deductions, taxes and more. Most importantly, it will give the mineral rights owner the final amount of the total value theyve earned for that month.



Terms of the Lease Agreement

The lease agreement itself is a legal contract that sets out all the different elements of the arrangement between the property owner and the oil and gas drilling investors. The lease agreement is a constantly evolving partnership throughout the United States. While there is no standard lease agreement, there are certain essential elements that leases will contain.

The different elements of the private lease agreement include:

Date the agreement becomes effective

Parties who are involved and bound by the contract

Agreed-upon use of property and purpose for the agreement

Amount of royalties due to the mineral rights owner

Dry-hole clauses in the event of finding a dried well

Delay rental clause that allows the oil company to defer drilling by paying the delay rental fee

Surrender clause outlines the rights of the oil company, should they surrender the lease

Liabilities of the company in case of damages

Clauses regarding landowner activities, such as what happens if the property is sold or property taxes and mortgages arent paid

All of these elements and clauses of the contract make up the terms of the agreement and become legally binding between the two parties. It is critical for private mineral rights owners to understand the terms and functions of each item in the lease agreement in order to negotiate a fair agreement with confidence.

Be aware also that lease agreements and legalities may vary from state to state, so its not necessarily helpful to compare your lease agreement to one from a different state. Depending on the individual contract, there may be more specific items in each unique agreement, such as any environmental protection stipulations or other clauses specific to the land.

Process of Private Oil and Gas Leasing

A private oil and gas lease agreement, and the eventual mineral extraction, typically follows a specific procedure. It starts when the oil and gas company contacts the landowner directly and ends years or possibly decades later, when the company has extracted the specific minerals and the lease agreement expires.

Here is a step-by-step guideline of what to expect as a private landowner following through with oil and gas drilling investment leases:

Being Approached by the Company

The process of forming a mineral lease agreement begins when the oil and gas company, or a representative of the company, contacts the private landowner, with a proposal to lease land for the possible extraction of minerals that exist under the surface of their property. This will usually come in the form of a mailed letter with a proposal.



The initial proposal is the companys or investors own standard contract that they will send as a jumping-off point. The agreement outlines how the company intends to enter the property, conduct geological tests and assessments and determine the viability of mineral extraction from the property.

The proposal will include an agreement form that outlines the terms of the contract as mentioned above.

Entering Into a Business Partnership

As the property owner, you may choose to move forward with exploring the possibility of a mutually beneficial business partnership. At this stage, you and your family have likely decided that the partnership with the oil and gas company could be a financially lucrative opportunity should it move forward.



In this stage, youll need to consider the financial benefits as well as the commitment you will have to make as the landowner. If the company pursues mineral extraction, it can mean a long-term contract that can last years.

Negotiating and Finalizing the Contract

Once youve decided to pursue a partnership with the oil and gas company, you will need to begin negotiating the terms of the lease agreement.



Your lease agreement may go through several rounds of negotiation before a final agreement is reached. You may even choose to bring in legal counsel when finalizing the agreement. Follow the tips later on in the article for more information on how to negotiate an oil and gas lease.

Before Drilling Begins

Once the lease has been signed and before drilling begins, there are a few things that must happen, including checking the land title and geological tests.

Depending on the terms of the final contract and the plans the oil and gas company has, the company may choose to begin testing the property as soon as possible for the presence of a viable mineral well. The company and their contractors, such as geologists, will enter the property and assess the available minerals and types of minerals.



If the company finds suitable minerals for extraction, it may decide to pursue the extraction of minerals from your property. Before anything can happen, it must be confirmed who the legal landowner is of the surface and mineral rights under the particular tracts of land involved in the agreement. This is where the oil and gas company hires landsmen to check the land title and confirm the specific details of ownership.

This process can actually be quite complex, as the landsmen must ensure that the land ownership has been deeded correctly from the time it was first conveyed to the original owner until the present day. The landsmen look for any issues against the tracts of land, such as liens, pending inheritance concerns, lawsuits, overdue taxes, bankruptcies or any other forms of disputes.

After this process is complete, and if everything checks out, the oil and gas company can move forward with setting up drilling production.

Beginning Drilling

Once the company has determined they will invest in drilling for oil and gas within your property, they then can pursue the actual drilling process of making a well. Drilling may not start right away. The decision of when to start drilling may depend on a number of different factors that the company has to take into consideration.



In the case of a drilling and production delay, there may be a delay rental term of the agreement that comes into effect. This will be outlined in your specific agreement, but usually involves the lessee paying the lessor a fee per acre after the first year of delayed rental.

While waiting for drilling to commence, you as the property owner will need to remain proactive in communicating with the oil and gas company. Youll want to know what their plans are and when they will begin drilling, so as to avoid surprises or inconveniences.

The whole process of drilling and creating a well with production equipment may take several months.

Once the well has been made, and throughout the course of production, you may also want to continue to maintain communication with the company in order to have a better idea of their ongoing and future plans. It will also allow you to know what to expect financially. The amount of time the company spends drilling for, and recovering, minerals directly affects your own long-term income as the mineral rights owner. Its important to be aware of when the production is nearing its conclusion.

Many landowners, however, dont have much to do with the oil and gas company directly and rely on their royalty stubs for updates on the operation.

Receiving Royalty Checks

Before you begin to receive royalty checks, youll receive a document that outlines your exact legal ownership in the units being produced. This is called the division order, and it details your own interest in the minerals that will be extracted, including crude oil, natural gas or liquid natural gas.



The division order document is generally received by the owners three to four months after the wells completion. As the mineral rights owner, this is a step forward toward receiving your royalty checks. The whole process from the time the well is drilled to the time you receive your first royalty check could be up to nine months, so be prepared for this type of waiting period.



Your Lease Agreement

Its important to view the lease agreement between yourself, as the landowner, and the oil company, as a mutually beneficial business partnership. By viewing the agreement in these terms, it will help prepare you for the negotiation process. Be sure to negotiate an agreement you feel comfortable with before signing the contract. This will also help prepare you for the long-term financial commitment you are about to embark on.

Whenever a mineral rights lease agreement between a landowner and an oil company terminates or expires, all mineral rights revert back to you, the landowner.

As the property owner, you are unable to form another lease agreement with another company until your current lease agreement expires. Once the agreement with the first oil and gas company reaches its end, then you are able to form a new mineral rights agreement with another oil and gas company.

Benefits of an Oil and Gas Lease

If youve been approached by an oil and gas company about a possible lease agreement, its important to understand the bigger picture. This includes some of the significant benefits available to you and your family should you reach a fair deal.

Here are some of the most rewarding and long-term benefits of an oil and gas lease agreement:

Lucrative Deal

Depending upon the lease agreement, the lessor can receive a lucrative income from the partnership with the oil company. As the landowner, you will receive royalties paid to you on an ongoing basis throughout the term of the agreement. The royalties are a percentage of the amount of mineral wealth extracted from the land and sold. The royalty percentage is typically 12.5%, but can sometimes be as high as 18% or more in certain cases.

The royalties paid depend on how successful the operation has been for the oil drilling investor. Royalties are the most lucrative part of the deal for mineral rights owners.

Delay rentals can also be paid to the lessor or landowner, should production not commence immediately during the primary lease term. The oil and gas companies can continue to pay the landowner a rental fee in order to keep the lease agreement active while they wait to start production. The delay rental, if part of the agreement, is generally paid to the lessor at the end of the first year. It is paid in the form of dollars per acre and ranges from $1/acre to $50/acre.



Another form of compensation may include a bonus, which is paid directly the landowner upon signing the agreement. This signing bonus is usually anywhere between $200 and $500 per acre. Though not all agreements include this, it may be something that can be negotiated.

Long-Term Income

Oil and gas production is a long-term, dynamic operation that can provide years of income to the landowner. Though the oil and gas well will eventually deplete over time, you will still continue to see long-term income. The initial stages of oil production are especially lucrative, and though royalty income will drop over time, its still a viable source of revenue.

The average life of an oil well is about 35 years. If youre fortunate enough to go through with an oil and gas lease investment and agreement, you will be involved in a long-term business venture that may provide years or even decades of passive income.

Being Part of the Oil and Gas Industry

When you agree to lease your mineral rights to your oil and gas business partner, you are agreeing to be involved in the important economic and development process of the oil and gas industry. Oil and gas leases are the staples of the industry and, without this process, it may be more difficult to exploit minerals on domestic land.

As a private landowner, you are a catalyst for the successful advancement the countrys mineral value, as well as the preservation of the history of privately owned minerals. By leasing your mineral rights, you can feel good about helping the nation meet its energy needs.

How to Negotiate an Oil and Gas Lease

Negotiating any contract can be overwhelming. But when it comes to an oil and gas lease, there are many factors to consider due to the long-term nature of the agreement.

If youre ready to negotiate your own oil and gas lease agreement, then follow these dos and donts to ensure you receive a fair deal:

Do:

Contact all family members

Know who youre speaking with

Openly communicate

Prepare for a long-term commitment

Act professionally

Perform extensive research

Don't:

Agree to one lease for multiple tracts of land

Handle it alone

Jump to sign the contract

Overlook lease amendments

Assume guarantees

1. Contact Your Family Members

In many situations, multiple family members own one property, as the land resides under the family name. If this is the case, its likely the oil and gas company is already aware. Its possible that the person acting on behalf of the oil and gas company has also contacted your family members with the proposal.

Working together to negotiate with the oil and gas company can prevent miscommunications between family members. Try to get everyone on the same page and present yourselves as one team that negotiates with the company together for a fair deal.

2. Know the Role of the Person Youre Speaking With

Oil and gas investment is a massive operation. As such, there are several different entities involved in any given agreement. When you are contacted with an initial proposal, determine right away who it is youre communicating with. The contact person may be any of the following:

An oil company employee : An in-house representative conducting and pursuing lease agreements.

: An in-house representative conducting and pursuing lease agreements. A broker or agent : An independent contractor working for a larger brokerage or directly for the oil company. These agents will work to negotiate the best possible deal for the oil company.

: An independent contractor working for a larger brokerage or directly for the oil company. These agents will work to negotiate the best possible deal for the oil company. A middleman or individual entrepreneur: Individuals will also work to negotiate oil and gas leases under their own name, and then sell them to the oil company, who has the capacity to drill. Depending on who is contacting you, youll be able to better understand their motives and prepare your own negotiation.

3. Openly Communicate

Open communication is essential to reaching a fair deal that all parties are happy with. If you have concerns, bring them up. If you dont understand something, ask questions.

By investing in the open communication of the negotiation process, youre demonstrating that youre being proactive, taking the procedure seriously and that youre going to make an excellent business partner.

4. Prepare Yourself for a Long-Term Commitment

When entering into negotiations, keep in mind that this is a long-term commitment. This means you shouldnt agree to anything youre not comfortable with, but also dont be too difficult to work with.

If all goes well, you could be looking at a partnership that lasts 30 or more years. Keep the end result in mind, which is a long-term stream of royalty revenue for you and your family.

5. Act Professionally

Sometimes, negotiations can become intense  especially when it comes to long-term economic deals. Treat the negotiation process as a business deal. Remember to remain professional, just as you would expect from the other party. Keep in mind youll need to work together for the long-term, and remember that remaining positive and constructive will make everything run more smoothly.

6. Conduct Research

Ask your neighbors, government agency staff and other landowners involved in oil and gas leases for their opinions on the specific company in question. This company, after all, will be your new business partner, so having a better idea of their background is a smart approach to take.

You can also conduct research online by doing an internet search on the individuals and the company. Also, be sure to visit discussion forums to speak with other mineral rights owners and investors.

7. Negotiate Separate Deals for Each Tract of Land

In the case where you have ownership over multiple and separate tracts of land, you may be offered one lease agreement. The single lease agreement may encompass all the tracts of land you own. In this scenario, its wise to negotiate separate lease agreements for each of the tracts of land.

Oil and gas extraction are dynamic processes that can take months or even years to complete. You dont want your one oil and gas agreement to be contingent on the production of all tracts of land. By negotiating individual lease agreements for the different tracts of land, it helps prevent problems down the road.

8. Seek Legal Counsel

Its always wise to involve outside counsel in these situations. Though its up to you when youd like to bring in a lawyer, remember that their time is billable. So you may choose to review the proposal first, begin the conversation and then hire a lawyer once youve gotten a better picture of the process.

Ultimately, a lawyers advice and services should help you to feel more confident in moving forward with the agreement  not less.

9. Take Your Time Signing the Agreement

One of the most important parts of negotiating any agreement is to take your time. Never rush into signing a contract without first carefully considering all aspects of the deal. By jumping to sign an agreement, you could set yourself up for stressful situations down the road.

Remember: Its expected that youll take your time to consider the agreement. So dont add more pressure by making any snap decisions.

10. Be Aware of Lease Amendments

Though not always the case, it sometimes happens that the oil company will try to amend the terms of the lease when the division order is sent to the royalty owner. Its important to be aware of this possibility so you can protect your agreed-upon interests. If you see any changes made in the division order that werent part of the originally negotiated lease agreement, you can strike these out.

Protect yourself from these types of situations by not letting your guard down. Stay proactive, so as to not overlook these possible lease amendments.

11. Dont Assume Any Guarantees

Once the company begins its operation, it doesnt necessarily mean they have found a viable well. They must go through testing and drilling. If they find no oil or gas, or dont find enough to make it economically viable, then they will abandon the agreement and the lease will expire.

Because nothing is certain until drilling happens, its best to not automatically assume youll be guaranteed an income. Only until they have successfully recovered oil, and the check is deposited into your account, are you guaranteed any royalty compensation.

Tips for New Mineral Royalties Owners

If youve become a royalty owner by leasing your own mineral rights, there are some tips to keep in mind regarding your partnership.

1. Be Aware of Oil Commodities

As a royalty owner, you are directly affected by commodity prices for crude oil and natural gas. Commodities fluctuate in price, which will determine your income each month. With a vested interest in the oil and gas industry, its important to understand market activity, how prices are set and when major economic shifts happen that will affect the outcome of your royalties.

Though you may not need to become an expert on how oil and gas prices are set, you do want to be aware of the different factors that go into negotiating the best mineral prices possible so you may benefit as well.

2. Review Your Royalty Stubs

When you receive your royalty checks, youll want to familiarize yourself with the information contained on the stub. The stub indicates items like:

Volume produced

Statement deductions

Tax deductions

Total royalty value received

By understanding the elements of your stub, you can begin to feel more in control of your mineral royalty ownership.

3. Remember That Your Partnership Is Mutually Beneficial

Both the mineral rights owner and the oil and gas company are working towards the same interests. Both parties wish to pursue a lucrative mineral production that operates efficiently and effectively to produce as much product as possible to earn the highest revenues possible.

By keeping in mind that you are both on the same team, it can help address and resolve any concerns that may arise during the agreement.

Moving Forward With an Oil and Gas Lease

When moving forward with an oil and gas lease agreement, its important to be committed, proactive and to treat all aspects of the process as a business venture. By following the information, procedures, tips and guidelines in this article, you can better prepare yourself for what to expect in entering into an oil and gas lease agreement whether you are the mineral owner or the investor.

There are plenty of informational resources available to you so you can conduct research and better educate yourself on oil and gas drilling lease investments.

Future Investment in Oil and Gas Leases

Oil and gas drilling investment leases can be a lucrative and rewarding opportunity for yourself and for the future generations of your family. It provides a steady, long-term stream of revenue, and is an important investment in securing future energy resources.

If youre interested in oil and natural gas drilling investment leases, try our free consultation to help decide which oil and gas lease investment options are right for you.