Oil & Gas Interests & Lease Negotiations
Published on Thursday, 31 March 2011 08:40 Written by Lawrence D. Brudy & Associates, Inc.
Oil and Gas Lease Negotiations generally begin with the landowner being contacted by a “landman,” – an agent representing a gas exploration / development company, and presenting a lease. There are multiple paragraphs and clauses embodied within the lease, this article’s focus will be limited to the forms and types of payments to the landowner.
Landowners are referred to as the “Lessor” and is the party who owns the mineral interests. The gas / development company is referred to as the “Lessee”, the party that is leasing the interests and responsible for the development of the land. Development includes but is not limited to exploring, drilling, extracting, conducting seismic and installing production equipment such as compressing, gathering, treating, dehydrating and separating stations.
The standard boiler plate lease agreements typically contain provisions for Lessor payments all of which are negotiable. Paid-Up Front Lease Bonuses – Negotiated by the landman and landowner or their Attorney with specific reference to the Marcellus Shale Formation, bonus payments vary from county to county in Pennsylvania and depend upon the shale thickness of the area, well production, and competition for the mineral interests. Lease bonus payments are a dollar amount per acre multiplied by the number of years for the lease. For example, a five (5) year “paid up” lease at $100.00 / acre / year for 100 acres would calculate as follows: $100.00 / acre x 5 year term x 100 acres = $50,000.00 paid upfront bonus payment.
Delay Rental Payments
Payments made on an annual basis calculated on dollar amount / acre x the number of acres. For example, leasing of 100 acres at $100.00 / acre for a five (5) year term. $100.00 x 100 acres x 1 year = $10,000.00 annual payment. Unlike the Paid-Upfront Lease Bonus, if a well is drilled or the lands are unitized and the property owner begins receiving royalty payments before the expiration of the lease primary term (i.e. 5 years) no other delay rental payments are required as the royalty compensation will maintain the lease most often referred to as being “held by production” (HBP).
Royalty Percentage Payments
These are the monthly or quarterly payments to the landowner based upon well production and unitization. Variables such as price / thousand cubic feet of gas, unit size, well production and royalty percentage with / without costs impact the payment. For example, using the following sample numbers annual royalty payments would be as follows: Royalty interest 15% without costs, $4.00 / thousand cubic feet of gas, 100 acres of landowner property, 640 acre unit size, 2.5 million cubic feet of gas produced / day = annual royalty payment of $85,546.88. Depending upon how the royalty percentage has been negotiated is determinative along with the other aforementioned variables of the annual payments.
Paid Upfront Lease Bonus, Delay Rental Payments and Royalties may be treated differently for federal income tax purposes and questions should be referred to a tax professional for answers.
The Attorneys at Lawrence D. Brudy & Associates, Inc. have successfully negotiated Oil & Gas Lease payment options for landowners involving thousands of acres in Northern and Western Pennsylvania. Call (724) 935-1400 for engagement information.
If you have a specific Oil & Gas lease or sale question and would like to discuss it with one of our firm’s attorneys, please submit your questions along with the owned acreage, county and telephone number to Julie L. Morris, Paralegal.
- Got to Ms. Go to Ms. Morris' contact page.