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Attorney James Decker’s advice to ranchers entering lease agreements for oil and gas exploration on their land is to have a lawyer with expertise in the subject and mineral rights on your team.
New oil leases
In the case of new oil leases, Decker says a land man generally will contact the landowner in person, or by letter or phone, about his company’s interest in leasing land for oil production.
“He might say, ‘Here’s a lease. Will you sign here?’ Typically, the landowner will call me, bring in the lease and we’ll review it.” Decker advises landowners against bowing to pressure to sign anything immediately. “Typically, the deal will still be there a week later,” he says.
Decker says his firm is involved with clients to varying degrees. Some feel competent in handling the negotiations on royalties and bonuses themselves, and utilize Decker’s expertise for market insight and to vet the final agreement. Other clients utilize Decker’s services for the entire process.
“While I will negotiate with the oil company at my client’s request, most of them just want me to inspect the oil lease to ensure their interests are protected. I’ll look through the lease, explain any provisions the client is concerned about, and develop any additional terms the client may need. Following that, I will talk to the land man and propose any additional terms.”
Those needs typically vary by the production use and value of the land, he says. For instance, crop farmers likely will have different surface-use requirements than a producer grazing calves on wheat or running cows on native pasture. And the specifics might deal with access rights and vehicle traffic; location of pipelines, flow lines, electrical lines; location and maintenance of roads; salt water disposal; drilling of water wells; water use and disposal; land reclamation; garbage disposal; fences and gates; hunting restrictions, etc.
Decker says the landowner’s leverage in negotiations is generally dictated by the amount of land he controls and the competition for its mineral wealth. Owners of large tracts, for instance, typically have more leverage than a landowner with 50-100 acres.
“Oil companies typically pay a cash bonus per acre, which is paid at signing of the lease. Meanwhile, the oil royalty is paid if and when production starts. If production starts and a good well comes in, the mineral owner can get a pretty decent royalty check. If the oil company drills dry holes and abandons the lease, there won’t be any money at all,” Decker says.
The bonus, which can vary widely, is a one-time payment to the mineral owner for signing the lease. “South of Stamford here, there isn’t a lot of competition for land, and the bonus is around $50-$60/acre. But if you go 40 miles west, where companies are competing for land, they’ll pay over $1,000/acre. I know of rural landowners who have covered the cost of their property just based on what they have leased it for oil production in the past year,” Decker says.
The oil royalty payment is also negotiable. “The old standard in this part of the world was a ¹⁄8 royalty, or 12½%, to the landowner, but it’s more like 3⁄16 today. Thus, if 100 barrels come out in a day, the mineral owner would get a check for ¹⁄8 of that value, and the oil company would get 7⁄8. Of course, the oil company has to pay for all the costs of drilling and operating the well out of their portion,” Decker says.
Today, however, landowners controlling larger tracts can achieve royalties much higher than ¹⁄8. “And once the competition starts between companies, those royalty offers can get up into to 20-25% range,” Decker says.