Mar 11
13
Oil and Gas Lease Terminology
Now that Oil and Gas is king in Western Pennsylvania once again, everyone needs to become familiar with the terminology that they may be exposed to if they are approached about an Oil and Gas Leasing situation. First of all, the owner of the oil and gas in place is generally referred to as the “LESSOR”. This may or may not be the owner of the surface. The LESSOR will be approached by someone from the oil and gas industry, usually a LANDMAN. A LANDMAN is generally not an employee of an Oil and Gas Company, but rather an employee of an independent contractor. The LANDMAN will attempt to have the LESSOR or landowner sign a LEASE. A LEASE is a document which permits the LESSEE, who in most cases is an oil and gas company, the opportunity to explore, develop, drill and produce some sort of petroleum product, either oil or gas from the LESSOR’S land.
The LEASE itself is a formal written document, containing many paragraphs and terms and conditions. Perhaps the most important terms that the LESSOR will initially be concerned with are the financial terms. Generally, the LESSEE will ask to enter into a LEASE with the LESSOR, the landowner, for a term of years. This term of years can be as little as one (1) year and as many as ten (10) years. Frequently, we see a five (5) year period as being the average, although sometimes there are three (3) year LEASES as well. Usually, the LESSEE will offer to pay so many dollars per acre as a RENTAL fee to the LESSOR for the privilege of exploring and developing the LESSOR’S land for oil and gas production. This RENTAL amount is usually on a per acre basis. Historically, we have seen per acre prices at a $1.00, $3.00 or $5.00 per acre. Recently, though we have seen per acre RENTAL prices as high as $4,500.00 per acre. Usually, the RENTAL is a one time, up front, payment to the LESSOR and can be a substantial sum of money when the LESSOR owns 50 or more acres.
Once the RENTAL figure has been determined, the second financial topic concerns ROYALTY. ROYALTY is that amount of money paid to the LESSOR for the privilege of allowing the LESSEE to extract the oil and gas or other hydrocarbons from the LESSOR’S land and to receive back a percentage of the value of that hydrocarbon as it goes on down the pipeline to market. Historically, Pennsylvania LESSORS have experienced ROYALTIES of 12 ½%. In fact, the Commonwealth of Pennsylvania, through its legislature has decreed that 12 ½% is the minimum ROYALTY that any landowner or LESSOR must be paid for his oil, gas or hydrocarbon products. Recently, we have seen LESSEE’S offering as high as 20% ROYALTY payments to the LESSOR for the privilege of removing the hydrocarbon products from the LESSOR’S land.
In every case where a LANDMAN approaches the landowner to negotiate an Oil and Gas LEASE, these terms are subject to contract and therefore can be bargained for. For instance, the parties may bargain for more or less on a RENTAL and more or less on a ROYALTY. Once an agreement is reached on those particular issues, the parties reduce their agreement to writing in the form of an Oil and Gas LEASE.
There are many, many other issues involved in an Oil and Gas LEASE. ROYALTIES and RENTALS are only a small portion of the issues surrounding a negotiation and execution of an entire Oil and Gas LEASE. These other topics will be taken up later in other articles presented in this forum.
If you have any questions concerning the leasing of real property for the purposes of oil and gas, please feel free to contact the Attorneys at Bassi, McCune & Vreeland, P.C., for all of your leasing needs. You may contact us at: www.bmvlaw.com
Thomas O. Vreeland, Esquire
Partner at Bassi, McCune, & Vreeland, P.C.
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