A Brief Introduction About the Oil and Gas Lease
An oil & gas lease is an agreement between two parties that allows the oil and gas company (the lessee) to access the property to drill and extract the minerals, gas or oil from the lessor’s property. This lease agreement is a legal contract that includes certain elements for confirmation of the agreement terms.
The lease should be dated correctly, the parties involved in the lease or the agreement should be mentioned on the agreement (Pierce, 1986). The consideration section of the leader provides various terms and conditions related to the agreement and also makes sure that is lease is legally enforceable by the parties involved.
The lease will include the details regarding the property usage, the purpose of leasing, and the granting clause. Granting oil & gas clause states the rights of the lessee and what is the property for. The most important part of this agreement is the period, as in how long the rights will be in force and secondly the rights of the lessee.
Who Takes the Oil and Gas Lease – People Involved
Two parties are involved in the oil and gas agreement one is the lessee, and one is the lessor. The owner of the minerals is the lessor and the company who has an interest in the minerals or the property is the lessee. The agreement is to allow the lessee the right to explore the property, drill and produce minerals, oil, and gas. The agreement builds trust and binds both the parties involved that are the lessor and the lessee.
Purpose of the Oil and Gas Lease – Why Do You Need It?
In most of the countries of the world, the mineral resources belong to the government (Porter, 199oil2). The mineral resources are in the form of oil, gas, rocks and other various types of minerals found within the earth.
Organizations cannot extract the minerals without the permission to use and explore the property, and because of which oil and gas lease agreement is formed. The purpose of this lease is to allow the lessor to have access to the property of the lessor and extract the necessary & required minerals. In the United States, the ownership of the mineral resources was initially granted to the organizations that owned the property (Pierce, 1986). These property owners shad both property rights as well as mineral rights. The owner has the right over the property and what is below the surface of the property.
He can rent it, lease it, or gift it, that’s up to him. Oil and gas lease has been a staple in the oil and gas industry. The lease includes the basic terms of the agreement between the two parties involved and to serve the needs of both parties.
The legal relationship established by the oil and gas lease has been remarkably successful in allowing private industry to exploit our country’s mineral wealth while preserving our heritage of private ownership of mineral rights.
[ Also Read: Mineral Lease and Coal Lease Agreement ]
Contents of the Oil and Gas Lease – Inclusions
- Date clause – The agreement or the lease should include the time that is from which to which date will be the lease be effective. The dating clause is an essential component of the lease.
- Parties section – Then it should include the details of the parties involved that is the lessor and the lessee.
- Consideration section – This part of the lease will include the legal terms and conditions that ensure that the lease is legally enforceable by both the parties involved.
- Granting clause – The use of the property, along with its purpose, will be included in this section. This means that the rights of the lessee and for what purpose the property is being used will be mentioned (Porter, 1992).
- Royalty cause – The most important thing for the lessor is the royalty because which is the percentage of the share of production that he will be receiving from the lessee in the form of royalty (Haile et al., 2010).
- Delay rental clause – The lessee attains rights in delay rental because which allows the lessee to postpone the immediate use or property if the obligation is completed by the lessee in the given period and pays the rental amount.
- Pooling clause – The Pooling clause mentioned in the lease establishes the rights of the lessee to combine leases and form a single unit if production.
- Warranty clause – Warranty clause states that the landowner owns as well as guarantees the property title in case of mortgages, taxes, and other obligations.
How to Draft the Oil and Gas Lease?
To draft the Oil & Gas lease form, the following steps will be taken.
- Firstly, it should be mentioned that the agreement is approved by the Board of the lease along with the land name, the effective date, details of the lessee and the lessor (Walker, 1928).
- Secondly, various clauses that are mentioned in the content section above will be included. This will consist of the granting clause, the term period, royalty, etc.
- After that, details regarding pre-paid delay rentals will be included which the lessee needs to pay to the lessor for the delay in payment.
- Fourthly, the payments, correspondence, and notice to the lessor will be included. This will be in terms of monetary payment (Porter, 1992).
- After that, data requirements, obligations, along with the right to audit, will also be considered.
- The next section will include the drilling operations details and reworking operations
- Followed by this will be the details regarding the partial termination, production acreage which depends upon the initial term period.
- Apart from the above details, the standard of care and duties of the operator will be included in the agreement.
- Lastly, details regarding the surface use provisions, cultural resources, environmental obligations like usage of water, sand, oil, or gas will be mentioned (Pierce, 1986).
Negotiation Strategy
During the oil and gas lease term period, the participants may negotiate to enhance the outcome. The lessor may negotiate to attain higher royalty or the share in the from the mineral extraction, and the lessee may negotiate to pay less royalty amount to the lessor (Porter, 1992).
Benefits & Drawbacks of the Oil and Gas Lease
Benefits – The oil and lease agreement allow the communities to benefit from various oil and gas projects. This agreement provides benefits to the companies to conduct business, to train the employees, and also to attain the opportunity to enhance the business by getting in an agreement with the party who can provide access to various minerals. The benefit is not only for the party who gets access to minerals but also for the second party which is the lessor to attain royalty in exchange for granting the permission to dig in the property and extract required minerals.
Drawbacks – The main drawback of oil and lease agreement is that the lessor may find a lot of difficulty in looking for an agent or an organization that wishes to extract and use the minerals from the property because of high financial risks (Hemingway, 1971). Another issue is that the property rights owner gets involved in complexity about the type of oil and gas agreement due to which high level of negation is required. To negotiate its vital that the lessor is well acquainted with financial, technical, and legal expertise (Pierce,1993).
What Happens in Case of Violation?
Both parties are obliged to follow the terms and conditions mentioned under the oil and gas lease. There are chances of a dispute arising from both sides of the agreement. In most of the cases, a dispute takes place on small work sites where there is the number of employers that have different business opinions and philosophies (Pierce, 1986).
Various disputes can lead to violation of oil & gas lease like issue in the term limit, failure to provide services as mentioned in the agreement or the lease, issue related to some kind of modification or negotiation, failure to provide adequate information which is important for expected performance, disagreement over translation of terms mentioned in the contract.
It depends on the firm as the firm’s management can help the employees and the lessor to solve the dispute related to the agreement(1) and find a mutually workable solution. From small disagreements to big lawsuits, the breach of contract can be mitigated with the help of a law firm.
To conclude, the goal of oil and gas leases is a grant for drilling operations to attain benefits from it. Whether it’s the owner of the mineral rights or property rights, the aim for the owner is to attain royalty or revenue from oil and gas transactions as the oil and gas industry is highly lucrative. Its recommended that before getting into oil and gas lease or agreement, both the parties should gather all the information and supporting documentation regarding the ownership, availability of minerals on the property (Porter, 1992).
This can include the details of deeds of trust, maps, previously signed leases, minerals, royalty, ratification, etc. It’s vital for both parties to property review these documents before entering into an oil and gas lease.