Leasing Mineral Rights
Curious about leasing mineral rights? We explain everything you need to know about leasing mineral rights in Texas. This information also applies to leasing mineral rights in any state.
Before you lease mineral rights there are some important things to understand. After reading this article you will understand:
- What a mineral lease is
- Important lease terms
- How to lease your mineral rights
- What is a fair offer to lease mineral rights
- How to negotiate a mineral rights lease
- How a mineral right lease effects mineral rights value
What is a mineral rights lease?
When leasing mineral rights, you should understand what a mineral right lease does. A mineral lease gives an operator (the company who drills for oil) the right but not the obligation to drill for oil.
When an operator identifies an area they want to drill, they will research who owns the mineral rights (oil and gas) underground. They will then approach each owner and make an offer to lease your mineral rights. This lease does two things:
- It gives them the ability to drill
- It determines your share of money from extracting oil and/or gas
Once an operator has leased all owners, they have the ability to drill. It’s important to point out that it is very common for an operator to lease mineral rights and never drill. You might be leased multiple times before drilling ever occurs.
Can you be forced to sign a lease? Technically no.
However, if you refuse to sign a lease you can’t prevent an operator from drilling for oil. If you could, a single owner could hold up drilling and nothing would ever get drilled. If you refuse to sign a lease, you will be force pooled if drilling does actually occur. This means you refused to sign a lease but you are still going to be paid for your share of the income generated. Generally speaking, you do not want to be force pooled. You have no ability to negotiate if you are force pooled.
Important Lease Terms
When an operator approaches you to lease your mineral rights, they will provide you lease agreement to sign. While these agreements are somewhat standard, there are certain terms that you should pay attention to. These are the terms that will ultimately determine how good or bad your lease is.
Royalty Rate / Royalty Percentage / Lease Rate: This is the most important mineral lease term. The legal minimum is 12.5%. The maximum is 25%. Technically there is no maximum, but 25% is the industry maximum that operators will pay. The higher your royalty percentage, the more you will be paid once oil and gas is taken out of the ground.
Lease bonus: When an operator offers you a lease, they will pay you for the right to drill for a period of time. This is called a lease bonus. The higher the lease bonus the better. A lease bonus could be $50/acre or $10,000/acre depending on your location. Amounts above $10,000/acre are possible, but exceptionally rare. The average lease bonus is between $500/acre and $2,500/acre. However, this average is very location specific. In some counties you won’t get $500/acre and in some counties accepting anything less than $2,500/acre is a bad deal.
Important: Your royalty rate and lease bonus are tied together. If you take a smaller up front lease bonus, you can negotiate a higher royalty rate. For example, if you are offered $2,500/acre and a 20% lease, you could negotiate for $2,000/acre and a 25% royalty rate. You are paid less up front, but the 5% higher royalty rate will pay off if drilling occurs.
Lease Term + Extension: In Texas, the standard lease term is a 3 + 3. This means that the operator has 3 years from the date the lease is signed to drill. In addition, an extension is almost always included in the lease. The extension gives the operator the right but not the obligation to renew your lease for an additional 3 years. This means the lease you are signing could be as long as 6 years, at the sole discretion of the operator if they choose to extend. In other parts of the country, (specifically the Northeast) a 5 + 5 is more common.
Pugh Clause: A pugh clause prevents an operator from leasing mineral rights, putting a portion of the mineral rights into a unit, drilling on those unitized mineral rights, and then holding the other mineral rights hostage with the lease even though you aren’t being paid for them. You should always have a pugh clause in your lease agreement. In Texas, a Pugh clause is standard. However, you should double check to ensure it’s included.
Deductions: If you are a savvy mineral owner in a good location, you can negotiate for no deductions. This means that the operator can’t deduct certain expenses from the royalties they pay you. This includes things like field expenses, marketing, and transportation costs.
Depth Restrictions: While very rare, you can negotiate for depth restrictions. This is uncommon in Texas. In places like WV and PA, you may want to negotiate depth based on which formations they plan to hit. In Texas, trying to negotiate depth restrictions is not necessary (and would be considered annoying) unless you have a very specific reason to do this.
How to Lease Mineral Rights
We are often approached by clients who want to lease their mineral rights. They ask us how to lease mineral rights.
The answer is that you can’t really do anything to lease your mineral rights. Operators will decide when and where they want to drill. They will then contact you to secure a lease so they can begin drilling. You can’t approach an operator and ask them to lease because it simply doesn’t work that way. They will approach you when they are ready to lease.
The only thing you can do ensure your mineral rights are ready to be leased is making sure you are easy to find. If you have moved, make sure you file a change of address with the USPS. You may even file something at the county clerk where you own the mineral rights to ensure your address is updated and on file.
Fair Offer to Lease Mineral Rights
Another common question is what is a fair offer to lease mineral rights.
There is no way to answer this question. One area may be hot for a while and leasing is competitive among operators. Lease prices may surge and higher royalty rates are common. Then, some poor quality results from wells occur and all of the sudden leasing activity dries up. The price operators are willing to pay for a lease varies dramatically over time. The price of oil and gas also has an impact.
There is no rule of thumb that will tell you what a fair offer to lease mineral rights is. You simply have to negotiate when you are approached.
How to Negotiate a Mineral Rights Lease
What is the best way to negotiate a mineral right lease?
Refer to the lease agreement terms we listed above. These are the lease terms you want to negotiate.
What lease terms you negotiate and how aggressive you are depends on your location and how many acres you own. If you are in an active county with a lot of active rigs, you have more room to negotiate. How many net mineral acres you own also pays a role. If you have 1 acre, you have a lot less negotiating power than someone who has 120 net mineral acres.
Royalty Rate: The legal minimum is 12.5%. If you are offered a 12.5% lease, try and negotiate a 3/16th (18.75%) royalty. If you are in a good location and you get offered a 3/16th, try for a 25%. Whatever they offer up front, negotiate for a higher royalty rate unless you get a 25% lease rate offer. Here are the common royalty rates:
- 12.5% (common, but bad)
- 16% (uncommon)
- 18.75% (very common)
- 20% (common)
- 22% (uncommon)
- 23% (uncommon)
- 25% (common in good areas)
Do not try and negotiate some weird lease rate that isn’t listed above. It will make you appear to have no idea what you’re doing. Stick with the common rates listed above generally speaking.
Lease bonus: Ask for around 25% more lease bonus than what they offer inititally. However, use this as a tool to negotiate your lease royalty rate higher. If they offer you $2,500/acre and a 20% lease, counter at $3,000/acre and 25%. Ideally, you stay at $2,500/acre but get to bump your lease royalty rate to 25%.
Lease Term: Don’t accept anything higher than a 3+3 in Texas.
Pugh Clause: Don’t accept a lease without a Pugh clause.
No Deductions: If you are in a good area and like to negotiate, push for no deductions. Asking for this is uncommon and will make you sound astute in good areas. Asking for no deductions in a bad area will seem odd, but it never hurts to ask.
Depth Restrictions: Don’t negotiate this unless they bring it up.
Leasing Mineral Rights and Value
If your mineral rights are not leased, generally speaking they have little to no value.
Once you sign a lease agreement, they are going to be worth approximately 2x to 3x the lease bonus amount. For example, if you were paid a lease bonus (in total) of $50,000, your mineral rights are probably worth $100,000 to $150,000.
Signing a lease agreement has a positive effect on the value of your mineral rights. This means that mineral rights with an active oil and gas lease are worth more than mineral rights with no active lease. If you are offered a lease, you should negotiate the best deal you can and sign it.
Free Consultation – Leasing Mineral Rights
Do you have questions about leasing mineral rights? If so, reach out to us and we can help answer your questions.
While we don’t help mineral owner market mineral rights for lease, we can still assist you in answering questions. If you decide you want to sell mineral rights, we can also assist with that.