Oil & Gas Leases: 10 Common Mistakes During Mineral Lease Negotiation
Top 10 Things Not To Do When Negotiating Oil and Gas Leases
Negotiating oil and gas leases requires knowledge, patience, and a balanced mindset. Every day across America, mineral owners receive oil and gas lease proposals asking to lease their mineral interests. Negotiating the lease is a big responsibility. Unfortunately many mineral rights owners don’t do their homework and miss available upside during oil and gas lease negotiations. Along with a sister article titled Oil and Gas Leasing – Top 10 Things TO DO, we present here things not to do when negotiating oil and gas leases. Hopefully you won’t find your actions among these.
Don’t Jump at the Sight of an Oil and Gas Lease!
Don’t immediately pick up the phone to the leasing agent (landman), gushing with emotion that you’ve received a 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. Properly negotiating gas leases takes time. Practice patience. Don’t Focus on Price Alone Lease bonus payment and royalty percentage are NOT the only two things that matter. Of course the economic implications are important, but these are far from the only important aspects of the oil and gas mineral lease negotiation. Everything is negotiable. In the case where you own surface rights along with mineral rights, the terms related to surface usage can be quite important, possibly more important than lease bonus and royalty percentage.
Don’t Immediately Sign Anything Just Yet
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. Proper oil, gas, and mineral lease negotiations should progress intently, yet within a patient framework. Once signed, an oil, gas and mineral lease is a binding document. Again, negotiating oil leases takes time.
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 Rush to Hire a Lawyer
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 Warrant the Mineral Title
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 the warranty clause. Don’t warrant the mineral title.
If you have concerns about the chain of title on your property, you might go one step further and completely disclaim warranty of title in your lease.
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 Spout Off during Negotiating
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.
Watch for 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.
- Oil & Gas Leasing: 10 Things To Make Sure You Do – Discover valuable tips for negotiating an oil and gas lease. Avoid costly mistakes when negotiating your oil and gas lease.
- Oil & Gas 101: Oil and Gas Basics for the Mineral Owner – Article explaining the basics of oil and gas production written for mineral rights owners. Topics include drilling, production, pricing and marketing.