Oil & Gas Leases in Texas
Oil and gas leases have nuances that differ from standard contracts making the services of an experienced attorney particularly valuable when negotiating leases or resolving related conflicts. An oil and gas lease is a contract that conveys rights to extract and market the oil and gas resources below a tract of land for a period of time and specifies the terms under which exploration and production will be conducted. Oil and gas agreements include terms that specify a royalty that will be paid to the landowner for gas or oil actually produced, and the schedule for payment.
Oil & Gas Lease Negotiations
Oil and gas leases are usually negotiated with landowners by 'landmen' who represent oil and gas companies.
Landmen provide services to oil and gas companies such as:
- Determining mineral rights ownership
- Negotiating leases for exploration and production
- Researching title status and resolving title issues
- Unitizing or pooling of interests in oil and gas reservoirs
Landmen represent the interests of the oil and gas companies they work for and a usually far more knowledgeable about the nuances of oil and gas leases than the landowners they negotiate with. Consequently, uninformed landowners can be at a significant disadvantage when negotiating an oil and gas lease without qualified counsel.
There are many negotiable considerations that should be carefully evaluated and explicitly addressed in the lease agreement. Following is a summary of some of the many issues that may be addressed in an oil and gas lease:
- Royalties - Most leases will include terms specifying the royalty rate, method of calculation, payment schedule. A lease may also specify limits or prohibitions of royalty-reducing deductions for post-production expenses.
- Bonuses - Lease terms may stipulate sign-on, production, or other bonuses.
- Environmental Issues - Lease terms should address conservation and land protection to protect water, agricultural, grazing, and development potential. They should address the operator's responsibility for environmental cleanup, and address issues such as the potential abandonment of equipment on the property after drilling and production have ceased.
- Surface Issues - Leases may include terms that deal with equipment placement and surface use, limiting where and to what extent operators may place structures and equipment. The terms may limit surface damage and require surface repairs after property has been damaged by drilling and production.
- Water Rights - Water rights issues should be addressed to avoid potential conflicts over water resources. Scientists at the Jackson School of Geosciences at the University of Texas at Austin, who have worked closely with producing companies to develop the Barnett Shale, see potential for conflict in some parts of the Barnett where water use for hydraulic fracturing could begin competing with other uses such as drinking and agriculture.
- Scope of Lease - Lease terms should very clearly define the scope of the land and resources included in the lease, and may include limits and exclusions on depth of drilling, specific mineral resources and other factors.
- Lessee's Qualifications - The lease terms may specify certain qualifications the lessee must have and maintain, providing assurances that they are qualified to develop and produce under the lease terms.
- Lease Term & Deadlines - Oil and gas leases are usually limited to a finite period. However, they may have clauses that provide for automatic extension based on certain circumstances. Missed deadlines may constitute a breach of contract on the part of the oil and gas operator, and production after a missed deadline may not be subject to the terms of the lease.
- Delay Rentals - In an "unless-delay rental" lease, a lessee agrees to pay delay rentals so long as the lessee is not drilling on the property. An "unless" oil and gas lease terminates automatically if the lessee fails to drill within the specified time or pay the delay rentals as called for in the lease.
- Indemnification & Insurance - Oil and gas companies may seek overbroad indemnification for damaging events that could occur during the term of the lease. Leases may include terms that limit the scope of indemnification, require operators to carry ample insurance to cover most eventualities, and require that the landowner is named on the policy as 'additional insured'.
- Pooling of Interests - Pooling of interests occurs when land tracts from multiple leases are combined in a pooled unit for the purpose of drilling a single well. With pooled interests, the production of the well is considered to have occurred on all the leases in the pool. Royalties are generally paid in proportion to the amount of land a landholder has in the pooled unit.
- Assignment of Rights - An oil and gas lease may include terms that limit the oil and gas company as lessee from assigning their rights to another party.
Contact a Houston Oil & Gas Attorney
In addition to the express terms of a lease, an oil and gas company may also have several implied duties under the law. If an oil and gas company has violated the terms of your oil and gas lease, or has failed to fulfill other duties, you should contact a Houston litigation attorney for assistance. If your royalties have been unfairly reduced or withheld, or if your property has been damaged, you may be entitled to actual and punitive damages from those responsible. If an operator has failed to develop a lease according to their express or implied obligations, they may be in breach of contract and you may be able to seek damages or negotiate a new, more favorable lease with another operator.
Contact a Houston oil and gas lawyer from our office today.