Oil & Gas Basics – Understanding Leasing Your Minerals
What Happens When I Lease My Minerals?
When you, the mineral owner, lease your minerals, you are referred to as a “lessor”. The person that you are leasing to, generally an oil company, is known as a “lessee”. The lease that you sign is granting the lessee a limited right of possession for a period of time defined in the lease. This period of time is known as the “primary term” and is generally for two to three years. If an oil company is able to find oil on your property during the primary term, and is able to produce the oil profitably, then the term of the lease will extend beyond that of the primary term. This period outside of the primary term is known as the “secondary term”, and the secondary term will stay in effect for as long as the oil and gas production is occurring (profitably or otherwise) on the property.
Sometimes a lease can outlive the primary term even if there hasn’t been a well drilled on the property, or it can stay in effect in the secondary term even if production temporarily ceases. This is made possible by certain clauses included in the lease. Some of these clauses include:
Shut-in Royalty Clause
Delay Rental Clause
Dry Hole Clause
Because of the complexities involved in an oil and gas lease form, it is recommended that you hire oil and gas consultants to assist you in drafting a lease that is ideal for your specific needs and desires.
Can The Oil Company Come On My Property Without Permission?
If the oil company has a valid lease on the minerals beneath your surface estate, then they may use as much of the surface as is reasonably necessary to extract those minerals. A surface use agreement can be placed into the lease to clarify what the lessee can and can’t do to the surface, but absent such an agreement they can drill on the land, build roads, access the property at any time, etc.. This is another reason why it is important to hire an oil and gas consultant to help you with your lease.
What Is The Royalty Interest?
When you sign a lease with an oil company, you will retain what is known as a “royalty interest”. This royalty interest will allow you to receive a cost free share of the minerals produced from your property. The royalty interest can be very valuable for you, and this should be a significant area of focus during lease negotiations with an oil company.
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