Protecting a Landowner’s Rights in Negotiating an Oil and Gas Lease

By Kit F. Pettit, Esq.

With the recent activity in the area related to the Marcellus shale natural gas deposits that have proven to be abundant in our region, it is possible that you have been contacted by a natural gas exploration company or a land agent seeking to lease your oil and gas rights. Maybe you didn’t even know that you owned oil and gas rights.

If you receive a letter in the mail, or if someone even knocks on your door and expresses an interest in leasing your oil and gas rights, would you know what to say or do? Would you just sign the lease that was presented to you? Would you not consider signing anything because of the fear of the unknown? Before you do anything, you should be aware that…….

  • You have the ability to negotiate the “lease bonus” or “delay rental” payments. Typically, a gas company offers a “delay rental” or “lease bonus” payment. The purpose of this payment is to provide consideration to the landowner for the period of time in which the gas company does not develop the property. It is intended to “keep the lease alive” while the gas company decides whether it will exercise any of the rights granted to it by the landowner under the terms of the oil and gas lease. The delay rental or lease bonus payment is often in the form of a “paid-up” lease. This means that the gas company has decided to pay all delay rentals contemplated by the lease in one lump sum payment. A delay rental payment typically covers a period of sixty (60) months. The payment is typically calculated on a per acre basis. The dollar value paid per acre may vary greatly depending on several factors and can range from a couple of hundred dollars to a few thousand or more dollars.
  • You have the ability to negotiate the royalty amount. Pennsylvania law requires a minimum royalty payment of 1/8th of the value of the oil or gas produced, less certain costs as provided for in the lease. When a gas company or land agent offers you a 1/8th royalty payment, they are doing so because it is a requirement of the law. The royalty amount that a gas company or land agent will ultimately agree to is also dependent on several factors. You should always seek more than a 1/8th royalty interest although the gas company is not required to pay more.
  • When you sign an oil and gas lease, you are not only leasing the oil and gas rights for these minerals that lay underneath your property. Inherent with the lease of oil and gas rights is the right of the lessee to enter upon the surface of your property to explore and drill for the oil and gas that is being sought after. After all, what good is it to acquire rights to oil and gas if one does not have the ability to access the minerals? With a properly negotiated lease, you can protect your surface rights and limit the activities of the gas company on your land. Some of the items you may want to protect could include your natural water supply, ponds or spring, crops, timber, buildings and other personal property. It is important to fully understand what the oil and gas lease permits so you know what to be concerned about.
  • Certain lease provisions may allow the gas company to extend the primary term and not develop your property within the time period that you expected. By extending the primary term, the time period in which royalty payments may be received is also extended. You can limit the gas company’s ability to extend the primary term by negotiation as well.
  • You should promptly contact an attorney who knows oil and gas law if you have been approached by a land agent or an oil and gas company. A qualified attorney can assist you with the negotiation of your oil and gas lease to maximize the economic gains you will receive from the lease and protect your property from unnecessary gas drilling activities, equipment and structures.

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