Oil, gas, and mineral lease (“OGML”) disputes arise between the mineral rights owner (“lessor”) and the companies that leased those rights (“lessee”). A typical OGML will be “Paid-Up,” meaning an amount of money is paid when the OGML is executed; that money is the only guaranteed payment. This payment is called the “bonus.” Bonus amounts vary, depending on the type of hydrocarbons to be produced (natural gas is valued differently than crude, and a traditional pool of crude is valued differently than a shale formation), the number of acres, the forecasted price of hydrocarbons to be produced, and other land leased to the lessee that adjoin the lessor’s land. In addition to the bonus, lessors receive a “royalty,” or a percentage of the value of minerals produced. Royalty payments are contingent upon successful production of minerals.
A typical royalty is 25%, and it is paid on the gross value of the production (the costs of drilling and operating the well are not deducted from the royalty). Mineral interest owners with 100% of the mineral rights to many acres will have more bargaining power than a smaller interest owner has in negotiating beneficial lease terms.
Most mineral interest owners’ mistakes are made at the time they execute the OGML. To save money, some mineral interest owners fail to employ an attorney before signing a lease. This leads to the execution of an OGML that is drafted by the production company, and that contains terms that favor the production company. Many mineral interest owners are unaware that the terms of the oil company’s “form” may be negotiable. Engaging an attorney to negotiate more favorable terms of your OGML may produce more favorable OGML terms that can greatly outweigh the upfront expense if the lease is drilled and held by production over the next 5, 10, or even 30 years.
One common OGML form, known as a “Producer’s 88,” is one example of an OGML with draconian terms that greatly favor the oil company. Mineral right owners have caught onto this fact and, presently, the Producer’s 88 form is very rarely, if ever, still used. When the Producer’s 88 form is used, the lessor should attach additional pages – or “addendums” – to modify the lessee-friendly terms of that form.
Another tactic for mineral right owners with large acreage positions may be to lease only a portion of their rights – a small number of acres on which the well is to be drilled and the area immediately surrounding that well. While this reduces the bonus paid in the first lease because the number of acres leased is fewer than the total possible, if the first well is successful then having leased only a small portion of the total acreage benefits the lessor because the bonus and lease value of the neighboring unleased mineral rights increases once the production has been proven, and the producing well only holds by production those few acres that were originally leased.
Another lessor’s issue arises with what is known as a “Pugh Clause.” A Pugh Clause releases (or terminates the lease as to) that portion of the leased acreage after expiration of the primary term if no production is occurring on those acres and those acres are not pooled with acres that do have production. A Pugh Clause is more crucial for larger mineral interests, because it allows the released mineral interest to be released and not indefinitely held by production by a relatively small portion of the total acreage leased.
Mr. Allred routinely assists oil & gas mineral right owners and companies in their disputes.
By: Edward Allred
Watts Guerra LLP
4 Dominion Drive, Bldg 3, Suite 100
San Antonio, Texas 78257
Office (210) 447-0500
Mobile (210) 685-1845
eallred@guerrallp.com
© Watts Guerra LLP 2015
