Fruit growers faced with oil and gas leasing decisions: Part 1

A weather disaster coupled with an offer to lease mineral rights can provide tempting immediate cash flow, are there potential long term considerations to know before signing an oil and gas lease?

Weather or other factors can significantly and suddenly reduce business income. An unsolicited offer from someone leasing land may or may not be the answer to increasing temporary cash flow.

Many fruit growers are facing significant reductions in income due to spring freezes. When offered an oil and gas lease, it is tempting to sign the document immediately because of a cash payment, or an offered bonus. However, the bonus is a one-time payment. Bonus rates being offered in Michigan range from $25/acre to $150/acre. These are typically offered in exchange for signing a five-year lease with the option to extend it an additional five years, usually for an additional bonus payment at the same rate. For example, if the lease term is five years and the bonus payment is $100/acre, it is equivalent to $20/acre/year.

Oil and gas leases are binding contracts that can last for generations. Prior to signing, landowners are encouraged to thoroughly understand what the lease says and its long-term impacts on agricultural operations and alternative lease terms.

Potential landowner considerations regarding an oil and gas lease:

  • Are there alternatives to the five-year lease with a five-year extension?
  • What does it mean “your royalty will be calculated based on net income”?
  • What are the post production costs and can they affect my royalty?
  • Is there an alternative to a 1/8 royalty?
  • If roads, pipelines and other surface disturbances occur on my property, how will I be compensated?
  • If fruit trees are removed, will I be compensated for production losses for the remaining tree life?
  • Are there areas I can designate that forbid a well site, roads, storage tanks, etc.?
  • What is a non-development lease?
  • Is the oil company supposed to pay me for damages to the land surface?
  • How do I insure the land is reclaimed in the manner I wish?

These topics will be discussed in a series of articles. In the meantime, for more information regarding oil and gas leasing you can contact Curtis Talley Jr. at 23-873-2129. Michigan State University Extension Oil and Gas information site also has additional information to assist landowners in understanding and negotiating oil and gas leases.

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