How to Negotiate an Oil and Gas Lease

How to Negotiate an Oil and Gas Lease

If you have been approached by a landman to lease mineral rights or are considering leasing mineral rights yourself, it’s important that you negotiate the best possible lease bonus for your mineral rights.  There are a number of important factors to considering when leasing mineral rights and negotiation is one of the most important.   Here are the factors that you should consider as you negotiate your oil and gas lease:

The lease terms you negotiate are some of the most important because this will determine how much benefit you receive from a lease.   You want to negotiate the following:

Lease Bonus

The lease bonus you negotiate will determine how much you get paid up front.  You want to negotiate the highest lease bonus possible.  If the well is drilled and production is low or there is none, the lease bonus may be the only money you ever receive.  Negotiating the highest lease bonus possible will also lock in more money now so that if no drilling takes place, at least you have benefited from having your property locked up for a period of.

Royalty

The royalty you negotiate will determine what your percentage of future proceeds from the well is.  The royalty may not seem important initially but it can have a larger financial impact than the lease bonus if the well is a high producing well.  Your goal in negotiating the royalty is to get the highest royalty % possible.  Work to achieve at least a 16% royalty and preferably higher.  Note that as you negotiate a higher royalty percentage the amount you receive for a lease bonus will typically decrease.

Lease Term

When you negotiate the lease term, you want to attempt to get the shortest lease term possible.  The reason is that it forces the operator to actually drill the property in a timely manner rather than hold the lease without any activity.  Try and negotiate a lease of just 3 years is possible.

How to negotiate the best lease possible

If you want to truly negotiate the best lease possible, the trick is to fully understand everything about the area you are in.  Drilling activity, formation structure, oil and gas prices, and many other factors all play a part in negotiating the best lease possible.  We highly recommend working with an experienced oil and gas professional who can negotiate the best lease possible for you.  The reason is that industry professionals have experience negotiating a lease, are familiar with what’s going on in your area, and will also have access to other potential operators who may wish to lease which can lead to higher prices.   We recommend enlisting the services of US Mineral Exchange because they specifically help mineral owners by negotiating leases and securing the best terms possible for you.