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.