Know your mineral rights

Landowners who have never dealt with leasing their mineral rights for oil and gas production may find that they have difficulty understanding the lease language in layman's terms upon reading a lease. It's important to understand key phrases or terms often found in oil and gas leases.

Before any exploration can begin, the landowner and the oil company must agree to the terms regarding the rights, privileges and obligations of the respective parties throughout the exploration and production stages. Negotiation of these terms may be a landowner's first exposure to an oil and gas lease. Because of the complex legal nature of the leasing process, novice landowners may be at a disadvantage when dealing with an experienced land man or oil company. An oil and gas lease is both a contract and a conveyance of an interest in land. When you sign an oil and gas lease, you have essentially sold a part of your property. Obtaining a good lease is a negotiation, with the goal that it be a win-win situation for both parties. Negotiation of an equitable lease requires the assistance of an experienced oil and gas attorney or oil and gas leasing consultant. It is not advisable to sign a lease if your understanding of the provisions is not clear.

Below is a list of terms you should know. When the word "company" is stated, it is referring to the oil and gas company that is interested in leasing a landowner's mineral rights.
 

Phrases related to geophysical testing
"Exploring by geophysical and other methods." This allows the company to conduct seismographic studies to determine if drilling an oil and gas well should be considered. If the lease does not specifically call for the payment of surface damages for this activity, the landowner may not receive any surface damage payments when seismic work is conducted.
 

Useful or convenient easements
"Together with all rights, privileges or easements useful or convenient." This denotes unpaid usage of the land surface and allows the company to place roadways, pipelines and have other unnamed "privileges" wherever it is convenient for the company. The landowner can limit the activities that are unpaid and require payment for, or not allow certain activities.
 

Mother Hubbard Clause
"Or any other land adjacent or appurtenant thereto." This is called the Mother Hubbard clause. This permits the company to obtain the right to develop all contiguous or "appurtenant" lands owned by the landowner or that the landowner may own in the future. These can be adjacent, or they can be located in another township. Sometimes, landowners prefer to not lease all of their land. If the landowner accepts this provision, he is not reserving the right to negotiate a separate lease to the additional property in the future.

Disposition of brine or other chemicals
"…Establish and utilize wells and facilities for the disposition of water, brine or other fluids…" This gives the company permission to dispose of these items on your land including the construction of an injection well. Because this condition is contained in the granting clause portion of the lease, there is no provision to pay the landowner for this usage. Alternatively, the lease can state that prior written consent of the landowner is needed for the construction and location of such sites. In order to obtain the landowner's consent, a separate lump sum, annual lease or right of way payment may be negotiated.
 

Construction of support facilities
"…And construct tanks, power and communication lines, pump and power stations and other structures and facilities." This allows the company to construct such things as compressor stations and other buildings or facilities on the land surface with no payment to the landowner. Alternatively, the lease can state that prior written consent of the landowner is needed for the construction and location of such facilities. In order to obtain the landowner's consent, a separate lump sum, annual lease or right of way payment may be negotiated.
 

Pooling
"…Located on said land or lands pooled or unitized." Pooling is the company's right to consolidate your leased premises with adjoining tracts of land. Sometimes pooling arrangements are necessary to meet the minimum acreage required to obtain a drilling permit. For example, you have a 20-acre tract and your neighbor has a 20-acre tract that are contiguous. For this particular well, the oil and gas company is required to have 40 contiguous acres under lease. The pooling provision allows the company to combine the two tracts into a 40-acre pool so they can obtain a drilling permit. Pooling can also be used to extend the lease beyond the primary term, even if land in the lease is not producing a royalty. Even though the lease may state it has a three-year or a five-year primary term, it can be extended without the landowner's consent if pooling language allows it. Many leases contain multiple paragraphs that discuss the company's rights to pool. Many pooling clauses will operate to extend the entire leased premises even if only a portion of the lease is located within a unit that is paying the landowner a royalty. Alternate language is to only allow pooling to the extent it is needed to secure a drilling permit.

Expiration of the primary term
"…This lease shall remain in force for a primary term of three years …and in no event shall this lease terminate unless production of oil and or gas has permanently ceased." This means that even though you are not being paid a royalty, if the well on your land or on land that is pooled or unitized with your land is capable of producing any oil or gas, even if it is not enough to market profitably, the primary term of the lease will continue. Landowners may assume that when the lease states a primary term of three years that if there is no well present or a royalty being paid that the lease will terminate. Pooling language can be written so that the lease continues even though the landowner is receiving no royalties.
 

Royalty
"Company shall sell the oil and gas and pay Lessor 3/16 of the net amount… minus post-production costs incurred by company…to realize the market value." In Michigan, rule 324.61503b of the Michigan Oil and Gas Regulations forbids the oil and gas company from deducting post-production costs unless they are agreed to in a lease. Post production costs can significantly reduce the royalties paid to a landowner because these deductions are calculated by and charged by the company. It is not uncommon to see several paragraphs in the lease that discuss the list of possible deductions including "any and all other costs and expenses of any kind or nature… between the well head and the point of sale." Alternatively, the landowner can require that the company pay to the landowner the agreed upon royalty percentage based on gross proceeds at the well head, free of any expenses, with the exception of severance taxes.

Curtis Talley Jr. is an extension educator at Michigan State University Extension, talleycu@msu.edu.