Most oil, gas, and mineral leases (“OGML”) between the mineral rights owners leasing the minerals (“Lessor”) and the production company that is leasing the minerals (“Lessee”) contain fairly standard clauses. This article seeks to define and explain some of the more common clauses. Lessors must understand the meaning of these clauses in order to know their rights and the rights of the oil company under their lease. A thorough understanding of OGML clauses is essential to enforcing your rights. The more common clauses that lead to the majority of disputes that Watts Guerra LLP has encountered with its clients are defined and described below. For more information or for a review of your particular lease and facts, please contact us directly.
Effective Date: An OGML must state the date on which the OGML becomes effective. This date begins the OGML’s primary term.
Granting Clause: This clause specifies: (a) the land that is being leased; (b) which minerals are being leased (oil, gas, uranium, etc.); and (c) and what rights the production company has to use the surface land in an effort to produce the leased minerals.
Primary Term Clause: Most OGMLs are for a guaranteed term of three (3) years. During this Primary Term, the Lessee has no duty to produce any minerals and can still hold the lease for that period of time. The only payment that is guaranteed to the Lessor is the Bonus Payment.
Habendum Clause: Once the Primary Term expires, the habendum clause controls when the lease expires or how long it remains in effect (this lease term after the Primary Term is called the “secondary term”). These clauses usually define the Secondary Term as “so long thereafter as oil and gas (or whatever other minerals are being leased) is produced in paying (or commercially reasonable) quantities.” With a habendum clause, the lease remains in effect past the expiration of the Primary Term for so long as the Lessee is producing minerals and paying the Lessor a Royalty Payment.
Bonus Clause: Most OGMLs are “paid-up leases,” meaning that all lease payments are prepaid through the Primary Term when the lease is executed. The Bonus Clause specifies the amount of cash per leased acre that is paid as rent for the duration of the Primary Term.
Royalty Clause: The Lessor’s only right to receive payments in addition to the Bonus Payment is through Royalties. Royalties are calculated as a percentage of the value of all minerals produced, typically 25%. Royalties are “cost and expense free,” meaning that neither oil drilling costs nor costs of production may be deducted from the Lessor’s Royalty Payments.
Mr. Allred routinely assists oil & gas mineral right owners and companies in their disputes.
Written By:
Edward Allred
Watts Guerra LLP
4 Dominion Drive, Bldg 3, Suite 100
San Antonio, Texas 78527
Office (210) 447-0500
Mobile (210) 685-1845
eallred@guerrallp.com
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