What Is Reasonable Term (Length) Of Oil & Gas Lease?

Mineral owners should be aware of how long some oil/gas companies will tie up your minerals via the terms of their lease. The lease primary term is the length of time the lease is in effect during which drilling operations must commence or one of three things will happen...

1. The Lessee does commence drilling during the primary term and finishes the well. The Lessor would then collect royalties once production begins.
2. The lease contract might have an option to renew for an additional period, extending the primary term.
3. The lease will expire.

If your Lessee does drill and hits, the lease will be "held by production" -- "HBP." Hopefully, the Lessee will develop the remainder of your drilling unit in timely fashion. Unless you own minerals under a lot of land, you will not have any control over that. If you do own a lot of contiguous minerals (such as a farm or ranch), you might be able to negotiate continuous drilling operations provisions, which can ensure that additional wells are drilled within a certain time frame.

In most parts of the USA where there is active drilling, it is common to have the oil company offer to lease your land for a primary term of five years. Or maybe three years, plus an option for 2-3 years beyond that. So, the effect is a 5-6 year lease. You always prefer it to be as short a term as possible, but in most cases, five years is reasonable.

However, I have seen some leases where the Lessee is offering to lease for five years, plus a 5-year extension option. THIS IS TOO LONG -- DO NOT SIGN! Ten years is just too long to have your properties tied up.

If you ever get into a position to where you wish to sell mineral rights on your properties, an effective 10-year primary term is going to be very large negative. A mineral buyer is not going to like a 10-year term... that's a long time the Lessee can just sit there and do nothing. And if you never wish to sell mineral rights and just wait it out, ten years is a long time! If you sign that lease, the Lessee has the right to wait until over nine years has passed by before they even start planning to drill you a well. So, don't do it. Negotiate for a 5-year primary term only, with no option to extend.

What Is The 'Going Rate" To Lease Or Sell Mineral Rights?

Regarding leasing mineral rights for an oil and gas lease or selling mineral rights, it is human nature to ask 'What is the going rate in my area?' And the answer is 'whatever you can get.' Not trying to be flippant but relying on a 'going rate' can cost you a fortune. Only luck and fate are really in control. Just because somebody near you got a certain amount per acre doesn't mean you will. There are many factors that come into play. It might even be that you can't get an offer for your mineral rights. Again, each tract has its own certain set of circumstances. I have seen people get an offer, a good offer, and hold out because somebody nearby got more and end up getting nothing because the offer disappeared. The oil business is very fickle, be careful of falling into this trap. And in certain states, such as Texas and others, the mineral owner can effectively get 'cut out' of enjoying royalties for a long time and sometimes forever. It's impossible to cover all situations one might run across. Sometimes, a mineral owner lucks out by holding out for more; just remember than any offer must be carefully considered because it might be the last. There is no rule or law governing what one might get for an oil and gas lease or to sell mineral rights. It's just a free market, so, we are back to the answer being 'whatever you can get!' And, in fact, unlike real estate, prices paid for an oil and gas lease or an amount paid to sell mineral rights is not public information. In certain states, the amount paid for state leases is tracked but that does not mean one can get that same amount for his tract. I wish it were more definitive, but it's not!

In areas with a lot of competition for an oil and gas lease from different oil companies, a rate range is sometimes discernible but it varies widely! Nothing is certain in oil and gas. Also, the smaller the tract, the less leverage one has. It's a huge challenge and impossible to 'know' what is best to do. But try not to fall into the trap of relying on any 'going rate.' As for selling mineral rights, same thing applies, each tract is different and a buyer is going to analyze it with many factors in mind to assess the mineral rights value. With all of this in mind, it's best to consult an expert, someone with many years of experience, regarding value. Good luck!

P.S. Lastly, a 'signing bonus,' a 'lease bonus,' is only one factor to consider. There are other important parts to an oil and gas lease other than the amount paid to sign. If you are not experienced in oil and gas matters, hire a pro!

New Shale Play: Tuscaloosa Shale

Louisiana has long been an oil and gas producing state, having had prolific production onshore for about 100 years. And offshore, Louisiana leads the nation in oil and gas production. All of these oil and gas reservoirs are what we call conventional reservoirs, meaning the oil and gas is produced from porous and permeable or fractured sandstone, limestone or dolomite.

In the past few years, a new type of reservoir has come to the forefront -- unconventional. Primarily, these are source rock shales that heretofore were thought to be that and only that, a source rock that fed the conventional sandstone, limestone and dolomite reservoirs. But around 1980, George Mitchell of Mitchell Energy became convinced that the Barnette shale around Fort Worth, Texas held potential. He began experimenting, drilling many wells, spending a fortune, and not having much success. But, over about 20 years, he finally was able to crack the code and the Barnette shale became the first large-scale shale play in the world. And production soared, due to two technological achievements -- horizontal drilling and hydraulic fracturing.

The Barnette shale became the largest producing field in the USA and held that title until 2011, when the Haynesville shale took over the top spot. This shale play covers much of northwest Louisiana and east Texas. Well over 1,000 wells have been drilled and completed in the Haynesville shale. (The Barnette shale has over 14,000 producing oil and gas wells as of January, 2011.) The Haynesville shale boundaries are still being defined to the south and southwest, and development drilling is in the early stages.

Louisiana mineral rights owners and royalty owners are fortunate in that there is a new shale play experiencing widespread oil and gas leasing. It's called the Tuscaloosa shale (Tuscaloosa Marine shale by some) and stretches all the way across Louisiana in the central part of the state. (See Tuscaloosa shale map.) The Tuscaloosa shale is only a theory at this point, as drilling over the years has proved to be non-commercial. Yes, oil and gas are in the Tuscaloosa shale rock but getting it out profitably has been a no-go thus far.

There are several companies active in the Tuscaloosa shale. Devon Energy, Goodrich Petroleum, Amelia Resources, Indigo Minerals and Denbury Energy all have lease positions in the play. At least four wells have been announced for 2011 drilling.

The Tuscaloosa shale is almost the same geological age as the Eagle Ford shale of south Texas. It is slightly younger, but close to being the same "stratigraphic equivalent." The Eagle Ford shale stretches over 400 miles eastward from the border with Mexico, across South Texas to perhaps Sabine county. Thus far, the best production ends at Gonzales and Dewitt counties, but there is more exploration going on the east, towards the Louisiana border.

From there, we cross into Louisiana at southern Sabine parish and this might be the beginning of the Tuscaloosa shale. (We don't know yet!) The potential play goes all the way to into Mississippi. So, if the Eagle Ford shale and Tuscaloosa shale turn out to be productive relatively continuously in this "fairway," it will be a huge field, dare say the largest in U.S. history.

The Eagle Ford shale contains both oil and gas. It is thought that the Tuscaloosa shale will provide the same. In the past 30 years, prolific natural gas production has been discovered downdip in south Louisiana. So, theory is, oil production can be had (with modern technology) updip from the natural gas. This modern technology includes horizontal drilling, coupled to hydraulic fracturing.

Hydraulic fracturing is undergoing attack by environmental groups, claiming that it pollutes fresh water acquifers, causes earthquakes, and all kinds of claims. Yet, over 1 million "fracs" have been performed over several decades, with not one documented case of these claims. So, don't believe everything you read. Yes, the process should be regulated (and already is) but the Feds should stay out of this. The individual states can perform oversight just fine.

If one is a mineral rights owner in the Tuscaloosa shale, it could be their lucky day. This won't be known for a few years, as it will take many wells to "prove it up." But, oil and gas lease bonuses can come in handy, and if they do drill a well in a unit containing the mineral owner's mineral rights and royalty rights, royalty checks can ensue. And, as it happens in every oil and gas play ever discovered, some choose to sell mineral rights. Very few people have assets that they can sell when they "get in a jam" or need cash for any number of reasons. Selling mineral rights can be a solution for some. Plus, if the play gets hot, mineral rights can bring a healthy sum, and some choose not to pass up a big "guaranteed" cash payday. (See why sell mineral rights for more info on selling royalty rights.)

The announced development of the Tuscaloosa shale will be exciting to watch in 2011 and beyond. Here's to success, for Louisiana mineral rights owners!

If you seek professional help with oil and gas leasing matters or a sale of mineral rights, here is a Tuscaloosa shale oil and gas consultant you can have represent you.