I have some farm ground in McPherson County. I was recently contacted by a gentleman from I think Oklahoma that wanted to visit with me about leasing my ground to an oil and gas company. I was not clear if he actually worked for the oil company or not. I visited with him briefly over the phone and I agreed to let him send me a lease agreement to review. I have now received the lease and am not sure what everything means. The idea of an additional payment per acre sounds good on its face but I am not sure if it would be good for me to just sign it without talking to a lawyer. The gentleman wants to visit with me in the next couple of weeks and I am not sure what to do.
You are wise to be critical of the lease agreement and have a desire to have it explained to you before you sign it. There has been an apparent recent surge in efforts by oil and gas companies to get landowners to sign leases. In part, this is because new drilling techniques allow these companies to more effectively and efficiently extract these resources from the ground.
Many of these companies are based out of Oklahoma or Texas and it is not unusual for a “landman” to contact the landowner on behalf of the oil and gas exploration company. The landman often is not an employee of the oil and gas companies but works as an agent or independent contractor for the companies. The landman will often act as the intermediary between the companies and the landowner in negotiating and securing the lease.
The typical oil and gas lease is often referred to as a “form 88 lease.” This refers to a typical version of an oil and gas lease that has been drafted by the oil and gas companies with a focus on protecting the companies’ interests.
Consequently, these leases are often skewed against the landowner.
There are many offensive provisions in a typical oil and gas lease. Just a few of these possibilities are mentioned in this article.
Most leases allow the company to take great liberties with the landowner’s property. The lease may grant the drilling company the right to drain the landowner’s family pond to use the water in oil recovery efforts. The company may be allowed to build roads over agricultural land or otherwise interfere with farming operations with little, if any, compensation to the landowner.
Some leases may not obligate the company to restore the landowner’s land into its prior condition at the end of the lease term.
Form 88 leases also typically give companies wide latitude to almost perpetually lock up land subject to a lease, even after the primary term has ended. This should be examined as well.
Additionally, the lease will include a range of payment provisions. If the company proposes a “paid up” lease the landowner should research typical going rates for these types of leases. Sometimes landowners will even band together to increase the amount offered as an upfront payment.
Along with securing the land, the landowner may be able to get upfront compensation for certain initial actions by the company that interfere with the landowner’s property. The landowner can also negotiate the royalty payment, which is generally a percentage of the profit that is generated that goes to the landowner if there is oil or gas production on the land.
The above merely highlights a few of the typical concerns for a landowner inherent in most oil and gas leases. Once you sign the lease, you will be bound by its terms. Thus, before you sign any document that you do not understand, it is wise to consult with someone that can help explain it to you.