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In this video, Attorney Ray Kerlick gives an overview of what mineral owners should know about oil & gas leases in Texas. Mr. Kerlick is a Partner of the firm.
This is a summary of the video.
– Hello. My name is Ray Kerlick. I’m a partner in the law firm at Wadler, Perches, Hundl & Kerlick in Wharton, Texas. Today I wanted to discuss with you a little bit about oil and gas leases and production in Texas. As many of you may know, oil and gas is a part of real property or real estate that you as a real estate owner may or may not have an interest in. For those of you that do have interests in the minerals or oil and gas under your property, it’s important to know that legal documents are required to lease this oil and gas, and actually extract it or produce it from the ground.
What is an Oil & Gas Lease?
So I want to talk a little bit about some of the terms that you’ll probably come across in dealing with a situation involving the leasing of your oil and gas or other minerals of your property. The first thing is the term “Lease.” Now, a lease in this setting, an oil and gas lease is a different kind of lease than those that most of us are familiar with being a residential lease or an apartment lease. In this setting, a lease actually involves removing something from the property, and that is your oil and gas. The term lease is a term of art. It’s a legal term, and the way it works is that, essentially, instead of paying rent, the oil company as the lessor actually pays you a royalty or a percentage of the oil and gas that they produce. Most of these ideas are pretty familiar, but the terms themselves may not be.
What’s the Term of the Oil & Gas Lease?
Every oil and gas lease has a term. That term is in a number of years. It could be anything from a number of days or months to a number of years. So long as the lease is in place, meaning it’s within the term of the lease, the oil and gas company has the right to come out and remove oil and gas from your property typically by drilling wells.
What’s a Bonus in an Oil & Gas Lease?
The other important term that most people are familiar with is bonus. So bonus is just what it sounds like they have with professional football players, you sign a contract, and you are paid a bonus for signing that contract. So in this setting, when an oil and gas company approaches you about signing a lease, they will typically offer a bonus for you to sign a lease with them that allows them to extract oil and gas and other minerals. This is on top of the royalty or percentage that they will pay you after those oil and gas and other minerals are removed and sold.
Consult with Your Attorney Before You Sign an Oil & Gas Lease
So, important idea to keep in mind and the reason it’s probably always best to contact an attorney before considering or certainly signing an oil and gas lease is that there are numerous provisions dealing with how your oil and gas is extracted, and how long the oil and gas company can keep your property held or under the lease. There are a variety of ways that oil and gas company can hold your property, and keep you from leasing it to another oil and gas company, but typically it’s done by drilling some well. So long as there is a well on your property, there is at least an argument unless you have drafted the lease appropriately or properly that they are holding all of your property with just that one well. So anyone who say faced with this situation or been approached by an oil and gas company about leasing their property needs to discuss these issues with an attorney.
What’s Pooling in an Oil & Gas Lease?
Again, other issues that come into play had to do with pooling. And pooling is just another way of saying, I’m going to add your property to a property of one of your adjacent or neighbors, adjacent landowners and neighbors, and we’re going to make a larger pool of land under which we’re going to drill some wells. A typical oil and gas lease, there is some provision for pooling, but this must be agreed to and all of these terms are negotiable. How much of your property has to be in a pool? How much of your property can be in a pool? These are items that you should negotiate with the oil and gas company.
Other Provisions in the Lease
Each oil and gas lease also includes provisions related to how long and under what circumstances the lease will end. Normally, a lease ends when the oil and gas goes away, when there’s no longer production. However, there are also provisions that deal with limiting how much of the property can be held by one well so either by acreage or another way of dealing with that is with a vertical severance clauses. And what that means is we only hold or the oil and gas company can only hold the property down to the level where they drilled. They can’t hold below that so as most of you are familiar, there are different levels of oil and gas in Texas in different place or shales or sands in which the oil and gas is found. The oil and gas company, if properly negotiated, cannot hold more than the area that they’re actually producing. And obviously, as landowner, that would be the provision that you would be looking for.
Surface Land Use in an Oil & Gas Lease
Other items have to do with surface land in use, and we will discuss those in a separate video. But typically, there are provisions in each oil and gas lease that deal with how the oil company has to treat the surface of your property while they have your property under lease. Similarly, items dealing with roadways, fences, gates, things of that nature are all handled typically in this oil and gas lease. This oil and gas lease is a legal document. If it’s not in the oil and gas lease, what I can tell you is you absolutely do not have a legal right to enforce it. Whatever you may be told by the land man or the oil and gas company representative that approaches you, if it doesn’t end up in the final lease, it’s not a legal right that I can enforce as an attorney.
So, again, best bet is don’t do it on your own. What you should do? Have your lease examined by the attorney of your choosing. Go through what the options are. That doesn’t mean you’re always going to get everything you asked for, but you should know what the different terms available are so that you can negotiate the best deal for you. Good luck to you and thanks for your time.
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