While it has been several years since the presence of “landmen” in Walker County, I am often ask about mineral interest and a landowner’s rights whether it is a proposed oil and gas lease or the sale of real estate. So, I thought this a good subject for this week’s column.
If you own real estate, you may own mineral rights as well. I say may because it is not a given fact that you own the mineral rights to your property. It is possible that the mineral interest were sold previously. This is an important consideration because if you enter an oil and gas lease and later it is learned you have been overpaid, then depending on the oil and gas lease you signed, the producer can demand you repay the overpayment years later. Just saying you spent the money will not stop them from filing suit.
Most oil and gas leases presented to mineral owners are known as the Producers 88. These leases can be easily identified because in the upper lefthand corner will be printed PROD 88. The problem with the Producers 88 is not what it contains, but what it is vague about. It was written for the oil and gas industry and is very well written in THEIR favor.
One matter that is not vague is a statement that you the lessor are warranting the title to the mineral interest. This simply means you guarantee you own all the mineral interest. However, it is the Landman who is presenting you the lease that has done the research. He works for the lessee or oil and gas company, not you. He is paid by the oil and gas company, not you. If his research is wrong guess who is liable, you. This is just a small example of why you need to be very careful when signing an oil and gas lease.
I have long been taught, and through personal experience have learned, the best thing to sign is anything but a Producers 88 lease.
Too many people are drawn into signing bad leases because the Landman has waived a Bonus Check in front of them. A Bonus Check is payment just for signing the oil and gas lease. While this money can be tempting, it is carefully derived to entice you to sign without thinking about what you are signing and what rights you are giving up. Additionally, many signed leases are simply then sold to another party for more money. Meaning you left money on the table.
Each mineral owner has five (5) basic rights as follows:
1) The right to sign a lease
2) The right to explore for minerals
3) The right to receive a bonus for signing
4) The right to receive delay rentals
5) The right to receive a percentage of the production.
Within these rights are many considerations. For example, with the advent of new drilling technology companies now are able to drill deeper, into formations they have not been able to before and horizontally. If you sign a Producers 88 lease, the oil and gas company has the right to drill to the center of the earth. However, you could negociate a different payment based on depth and formation. You could even negociate a minimum royalty payment.
If you are also the surface owner, then you have many additional rights as well. These include how your surface is used, where access is located, the type of access, where the drill site is located and who may enter your property and what they may bring. Any guess as to who has the advantage on all these points in the Producers 88? Would you want a well site right up against your home or barn? How about an employee of the oil and gas company shooting that prize deer you have been watching?
As with any written document, the devil is in the details. There is not enough room for me to go over all of the details that should be considered and addressed when negotiating with an oil and gas company. Suffice to say, the lease document I draft and recommend is 50 plus pages and addresses not only your mineral rights, but your surface rights as well. The producers 88 is usually 2 pages.
When dealing with mineral interest and oil and gas leases the terminology used is often foreign to most individuals and the cards are stacked against you. Therefore, if you are approached by a Landman wanting to give you a “bonus” to sign a lease, do not feel alone. Remember, that Landman is acting in his own best interest and not yours. He is trying to get a deal done as quickly as possible so that he, or his company, may secure the minerals and often, turn around and sell the lease to another. You should seek the advice of an attorney familiar with Oil and Gas Leases to explain all your rights and how to negotiate the best lease.