The Oil and Gas Committee of the American Agricultural Law Association prepared a helpful article about negotiating an oil and gas lease. Originally published in 1982, the article is reprinted below with permission of the American Agricultural Law Association.
Landowners are experiencing a welcome upsurge in the exploration for oil and gas. Properties once considered marginal or doubtful now are being sought for potential commercial production.
Before any exploration can begin, the landowner (lessor) and the oil company (lessee) must agree to certain terms regarding the rights, privileges and obligations of the respective parties throughout the exploration and possible 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 arrangement, novice landowners may be at a disadvantage when dealing with an experienced landman or oil company.
No standard lease form is universally recognized and used by the oil and gas industry. Instead, each company (or independent lessee) has a predrafted agreement that has proven suitable to them in the past. These agreements may not necessarily be in the best interest of the landowner.
Landowners should remember that all provisions of a lease are negotiable within reason. Even though the oil company representative or landman soliciting the lease may not have the authority to make changes, this does not mean certain clauses, or the complete lease itself, may not be altered. However, one's ability to negotiate more favorable terms will vary in each situation. Naturally landowners in areas considered "hot" will have more negotiating power than landowners in areas with unproven reserves or in "wildcat" areas.
Negotiating an oil and gas lease requires legal knowledge, foresight and common sense. No landowner could possibly hope to have all these suggestions included in a lease. The number successfully incorporated depends largely upon negotiating power. Even so, the information contained herein will enlighten the landowner as to some possible alternatives, and if nothing else, foster frank discussion between the landowner and the lessee prior to signing any agreements.
Visit our Oil, Gas and Mineral Leases page for more information.