What do landowners need to look for in an oil and gas lease? Part 2
Keywords: Disposition of Brine or Other Chemicals, Construction of Support Facilities and Pooling are covered in this article.
Landowners who have never dealt with leasing their mineral rights for oil and gas production, upon reading a lease, may find that they have difficulty understanding the lease language in layman’s terms. Are there keywords or phrases that someone should be aware of? This article will discuss language from leases utilized by the oil and gas industry that are offered to landowners. When the word "company" is stated, it is referring to the oil and gas company that is interested in leasing a landowner’s mineral rights.
Let’s look at some of the key phrases or terms that landowners have asked about:
Phrases or terms related to Disposition of Brine or Other Chemicalsmay read similar to:
“…Establish and utilize wells and facilities for the disposition of water, brine or other fluids…” This gives the company permission to dispose of these items on your land including the construction of an injection well. Because this condition is contained in the granting clause portion of the lease, there is no provision to pay the landowner for this usage. Alternatively, the lease can state that prior written consent of the landowner is needed for the construction and location of such sites. In order to obtain the landowner’s consent, a separate lump sum, annual lease or right of way payment may be negotiated.
Phrases or terms related to Construction of Support Facilities may read similar to:
“…And construct tanks, power and communication lines, pump and power stations and other structures and facilities.” This allows the company to construct such things as compressor stations and other buildings or facilities on the land surface with no payment to the landowner. Alternatively, the lease can state that prior written consent of the landowner is needed for the construction and location of such facilities. In order to obtain the landowner’s consent, a separate lump sum, annual lease or right of way payment may be negotiated.
Phrases or terms related to Pooling may read similar to:
“…Located on said land or lands pooled or unitized.” Pooling is the company’s right to consolidate your leased premises with adjoining tracts of land. Sometimes pooling arrangements are necessary to meet the minimum acreage required to obtain a drilling permit. For example, you have a 20-acre tract and your neighbor has a 20-acre tract that are contiguous. For this particular well, the oil and gas company is required to have 40 contiguous acres under lease. The pooling provision allows the company to combine the two tracts into a 40-acre pool so they can obtain a drilling permit. Pooling can also be used to extend the lease beyond the primary term, even if land in the lease is not producing a royalty. Even though the lease may state it has a three-year or a five-year primary term, it can be extended without the landowner’s consent if pooling language allows it. Many leases contain multiple paragraphs that discuss the company’s rights to pool. Many pooling clauses will operate to extend the entire leased premises even if only a portion of the lease is located within a unit that is paying the landowner a royalty. Alternate language is to only allow pooling to the extent it is needed to secure a drilling permit.
For more information regarding oil and gas leasing you can contact Curtis Talley Jr. at 231-873-2129. Michigan State University Extension also has an oil and gas website that has additional information to assist landowners in understanding and negotiating oil and gas leases and the oil and gas industry in general.
This article is one part of a three article series regarding oil and gas leases. You can learn more about geophysical testing, useful or convenient easement and mother hubbard clause by visiting What do landowners need to look for in an oil and gas lease? Part 1 or about expiration of primary term, royalty and negotiation by visiting What do landowners need to look for in an oil and gas lease? Part 3.