Business & Government

Getting The Most Out Of Oil And Gas Leases

Drilling has changed drastically in the 13 years since the Real Estate Center’s Hints on Negotiating an Oil & Gas Lease was last revised.
By David Jones, Texas A&M Mays Business School June 10, 2015

oil
“When negotiating a lease, make sure you get prepaid for your surface damages.”

Drilling has changed drastically in the 13 years since the Real Estate Center’s Hints on Negotiating an Oil & Gas Lease was last revised. Those changes are reflected in the latest edition, now online. Author Judon Fambrough, an attorney with the center at Texas A&M University, said some of the most important changes involve horizontal drilling and fracking.

“Historically, you had one vertical well per drilling pad,” Fambrough said. “Now you have as many as six horizontal wells completed off one drilling pad. There are fewer pads, but they’re larger. When negotiating a lease, make sure you get prepaid for your surface damages, but make sure the amount the company pays is based both on the size of the drilling pad and each completion.”

Because of fracking, the amount of groundwater used for oil and gas extraction also has increased substantially, prompting landowners to charge companies for its use.

“Originally, the only thing companies used groundwater for was drilling, so most landowners gave the water free in return for the water well,” Fambrough said. “But fracking uses 10 to 40 acre feet of water per well, depending on which part of the state the well is located. That is a lot of water.”

Fambrough said companies now pay anywhere from 30 to 50 cents per barrel for water. The lease should specify (1) the water is metered as it’s coming out of the ground, (2) the number of gallons of water in a barrel, and (3) the frequency of payments from the company.

The revised guide also includes some important legal updates.

For example, case law required landowners to pay a portion of post-production costs, including such things as treating and transportation costs. Pre-production costs (exploration, drilling and bringing oil and gas out of the ground) are absorbed by the oil company. But three recent appellate cases challenge the law regarding the deduction of post-production costs, raising the possibility that landowners could receive royalties entirely cost free.

“The mineral owner’s share of post-production costs is based on the size of the royalty negotiated in the lease,” Fambrough said. “If you negotiate a 20 percent royalty, you will be responsible for 20 percent of the post-production costs. In essence, this amounts to a 2 percent decrease in the amount of royalties received. Twenty percent of the post-production costs translates into a net of 18 percent. Mineral owners would be wise to avoid these costs if possible. The revised publication discusses how this may be accomplished.”

The revised Hints also advises how landowners can avoid legal headaches when someone is injured on site and sues the drilling company.

“Landowners are usually included in the lawsuit filed against the drilling company when the well is on their property,” Fambrough said. “An indemnification agreement says that the drilling company agrees to save and hold you harmless from any damages. The problem is when the lease doesn’t have the word ‘defend’ in the indemnification clause. Without it, the company has an obligation to indemnify but no duty to defend. That makes you responsible for hiring an attorney and defending the lawsuit yourself. You’ll get reimbursed, but you don’t want the hassle.”

Hints on Negotiating an Oil & Gas Lease can be downloaded free.

Media contact: David S. Jones, Texas A&M Mays Business School.

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