OIL AND NATURAL GAS MINERAL LEASE
(FOR OWNER OF
(i) MINERAL ESTATE OR
(ii) MINERAL AND SURFACE ESTATE)
EXPLANATION OF TERMS
[NOTICE OF CONFIDENTIALITY RIGHTS: IF YOU ARE A NATURAL PERSON, YOU MAY REMOVE OR STRIKE ANY OR ALL OF THE FOLLOWING INFORMATION FROM ANY INSTRUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY BEFORE IT IS FILED FOR RECORD IN THE PUBLIC RECORDS: YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER’S LICENSE NUMBER.]
PAID UP Yes [___] No [___]
[IF THIS LEASE IS PAID UP AS CONFIRMED BY THE ABOVE PAID UP BOX CHECKED ‘YES’, OTHERWISE CHECK ‘NO’, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY THEN THIS LEASE IS CONSIDERED TO BE PAID UP FOR THE PRIMARY TERM HEREIN AND NO ANNUAL RENTALS ARE PAID DURING THAT PERIOD HAVING BEEN PAID IN FULL IN ADVANCE.]
THIS OIL AND NATURAL GAS MINERAL LEASE (hereinafter referred to as the ‘Lease’) is made this ______day of ______, 20____, (the “Effective Date”) by and between:
______, having an address at ______, hereinafter collectively, if more than one person or entity, called “Lessor” and ______, having an address at ______, hereinafter referred to as “Lessee”.
WITNESSETH, That for and in consideration of the premises, and all the mutual covenants and agreements hereunder set forth, the Lessor and Lessee agree as follows:
1 DEFINITIONS SELF EXPLANATORY; MANY LEGAL ACTIONS ARE BROUGHT BECAUSE OF A DISPUTE OVER DEFINITIONS AND WHAT WAS INTENDED BY THE PARTIES. AN EXTENSIVE DEFINITION SECTION IS PROVIDED, WHICH LENGHTENS THE LEASE, BUT ALSO SUBSTANTIALLY REDUCES THE LIKELHOOD OF MISUNDERSTANDINGS AND DISPUTES BETWEEN THE PARTIES.
2 LEASING CLAUSE.
THIS CLAUSE DESCRIBES EXACTLY WHAT MINERALS ARE BEING LEASED. MINERALS MUST BE PRODUCED THROUGH A WELL BORE AND NOT MINED. THE CLAUSE DESCRIBES WHAT PERMITTED OIL AND GAS EXPLORATION AND PRODUCTION ACTIVITY IS ALLOWED ON THE LAND BY THE OIL COMPANY. THE CLAUSE ALSO INCLUDES OPTIONAL SELECTIONS THAT ALLOWS THE LAND AND ROYALTY OWNER TO RESERVE CERTAIN PARTS OF THE MINERAL ESTATE, USUALLY DEEPER HORIZONS, TO ITSELF WHICH CAN THEN BE LEASED TO ANOTHER COMPANY THAT WOULD HAVE AN INTEREST IN DEEPER HORIZONS. THE CLAUSE ALSO ALLOWS LESSOR TO ALLOW THIRD PARTIES TO CONDUCT SEISMIC ACTIVITIES ON THE LEASED PREMISES IF SUCH DOES NOT INTERFERE WITH LESSEE.
3 LEASE PREMISES:
THIS CLAUSE PROVIDES THE LEGAL DESCRIPTION OF THE LAND BEING LEASED. IT INCLUDES WHAT IS CALLED A ‘MOTHER HUBBARD’ CLAUSE WHICH IS OPTIONAL: THIS CLAUSE EITHER WILL PERMIT OR PROHIBIT THE OIL COMPANY FROM LEASING OF LAND RIGHTS LOCATED NEXT TO THE OWNERS LAND, SUCH AS EASEMENTS, RIGHTS OF WAY, ROADS, ETC. GENERALLY LAND OWNERS SHOULD NOT ALLOW LEASING OF SUCH EXTRA LAND RIGHTS WITHOUT ADDITIONAL COMPENSATION FROM THE OIL COMPANY.
4 LEASE PRIMARY TERM;
THIS CLAUSE CONTAINS THE TYPICAL MAXIMUM ‘PRIMARY TERM’ (TYPICALLY SHOULD NOT BE MORE THAN 3 YEARS, AND NEVER MORE THAN 5) DURING WHICH THE OIL COMPANY MUST ACTIVELY DRILL EXPLORATION WELLS AND FIND OIL AND GAS. ONCE THIS PRIMARY TERM EXPIRES, THE LEASE EXPIRES IF NO OIL AND GAS HAS BEEN FOUND AND BEING PRODUCED IN PAYING QUANTITIES. DO NOT AGREE TO EXTEND THE PRIMARY TERM WITHOUT THE LAND OWNER BEING ALLOWED TO RENEGOTIATE TERMS OF THE LEASE. THE OIL COMPANY SHOULD ONLY HAVE A RIGHT OF FIRST REFUSAL (AND NOT A PREFERENTIAL RIGHT) TO COMPETE FOR THE EXTENSION OF THE PRIMARY TERM WITH OTHER COMPANIES SO THAT THE LAND OWNER CAN GET THE BEST DEAL. RIGHT OF FIRST REFUSAL MEANS THE OIL COMPANY CAN OFFER FIRST THE TERMS TO EXTEND THE LEASE AND THE LESSOR HAS THE OPTION TO ACCEPT OR REJECT SUCH OFFER, BUT THE OIL COMPANY IS NOT PERMITTED TO KNOW THE TERMS THAT MAY BE OFFERED BY ANOTHER COMPETING COMPANY. A PREFERENTIAL RIGHT MEANS THE OIL COMPANY HAS THE OPTION TO MATCH OR BETTER THE TERMS OFFERED BY ANOTHER COMPETING OIL COMPANY, THUS SUCH COMPETING TERMS MUST BE DISCLOSED TO THE OIL COMPANY.
A ‘TOP LEASE’ PROVISION IS PROVIDED WHICH PROVIDES FOR AN OPTION OF THE LESSEE TO EXERCISE EITHER A RIGHT OF FIRST REFUSAL OR PRE-EMPTION RIGHT, AS MAY BE AGREED, IN REGARD TO LESSEE BEING ALLOWED TO COMPETE WITH THIRD PARTIES DESIRING TO LEASE THE LEASED PREMISES AFTER THE PRIMARY TERM EXPIRES.
5 PRIMARY TERM DRILLING OBLIGATION.
THIS CLAUSE OBLIGATES THE OIL COMPANY TO DRILL EXPLORATION WELL(S) (THE NUMBER IS NEGOTIABLE) IN A CERTAIN PERIOD OF TIME DURING THE PRIMARY TERM OR ELSE FORFEIT THE LEASE. THIS CLAUSE CAUSES THE OIL COMPANY TO ACTIVELY EXPLORE ON THE LAND ELSE IT WILL BE IN BREACH OF THE LEASE. OFTEN TIMES OIL COMPANIES ARE JUST LEASING MANY LANDS AND EXPLORE ON ONLY A FEW AND THE OTHER LAND IS FOR PROTECTION IN CASE OF A DISCOVERY ON ADJACENT LANDS. MAKE SURE YOUR LANDS ARE ACTIVELY BEING EXPLORED AND NOT BEING USED AS JUST PROTECTION ACREAGE. IF A WELL IS NOT TIMELY DRILLED, LESSOR HAS THE OPTION TO DEMAND A FIXED AMOUNT OF CASH DAMAGE OR TERMINATE THE LEASE.
6 LEASE EXTENSION TERM.
THIS CLAUSE GIVES THE LAND OWENER OPTIONS OF HOW IT WILL PERMIT LEASE EXTENSIONS IF OIL AND GAS HAS NOT BEEN FOUND AND BEING PRODUCED IN PAYING QUANTITIES DURING THE PRIMARY TERM.
7 POST-PRODUCTION RIGHTS AND OBLIGATIONS.
THIS CLAUSE DESCRIBES WHAT THE OIL COMPANY MUST DO TO KEEP THE LEASE IN FORCE BY ACTIVELY EXPLORING AND PRODUCING ON LEASED LANDS. FAILURE TO DO SO WILL CAUSE THE LEASE TO EXPIRE IF NOT HELD BY A POOLED UNIT OR BY PRODUCTION IN PAYING QUANTITIES.
8 SHUT-IN WELLS AND SHUT-IN ROYALTY.
THIS CLAUSE ALLOWS THE OIL COMPANY TO MAINTAIN THE LEASE IN FORCE FOR GAS WELLS IT IS TRYING TO SECURE A GAS MARKET. IT CAN KEEP THE LEASE IN FORCE BY PAYING THE LAND OWNER A SHUT IN ROYALTY OR FEE. SHUT IN ROYALTY PAYMENTS ARE LIMITED TO 2 YEARS MAXIMUM AFTER WHICH THE LEASE TERMINATES IF THE OIL COMPANY CANNOT PRODUCE GAS IN PAYING QUANTITIES.
9 OFFSET OBLIGATIONS.
THIS CLAUSE REQUIRES THE OIL COMPANY TO PROTECT THE LEASED LAND FROM BEING DRAINED BY NEIGHBORING WELLS. IF THE OIL COMPANY DOES NOT DO THIS, THE LEASE CAN TERMINATE. DRAINAGE IS DETERMINED BY THE LOCATION OF UNDER GROUND OFFSETTING WELL BORE AND NOT WELL SURFACE LOCATION, TO TAKE INTO ACCOUNT SUBSURFACE HORIZONTAL WELL BORE HOLES WHOSE SURFACE LOCATION MAY BE THOUSANDS OF FEET FROM THE LEASE BOUNDARY BUT WHOSE HORIZONTAL WELL BORE IS DRILLED TO WITHIN A SHORT DISTANCE OF THE LEASE BOUNDARY WHICH COULD CAUSE DRAINAGE OF THE LEASED PREMISES.
10 PAYMENT TO LESSOR.
THIS CLAUSE DESCRIBES THE PAYMENTS OWED THE ROYALTY OWNER BY THE OIL COMPANY. DELAY RENTAL CAN BE PAID ANNUALLY FOR EACH YEAR OF THE PRIMARY TERM OR CAN BE PAID IN FULL IN ADVANCE (WHAT IS CALLED A ‘PAID UP LEASE’) FOR THE ENTIRE PRIMARY TERM PERIOD. EVEN IF DELAY RENTALS ARE PAID, IF THERE REMAINS AN OBLIGATION TO TIMELY DRILL EXPLORATION WELLS. ROYALTY PAYMENTS ARE DESCRIBED IN THE ADDENDUM. ROYALTY COVERS NOT ONLY OIL AND GAS, BUT ALSO OTHER VALUEABLE PRODUCTS THAT MAY BE PRODUCED FROM THE LAND SUCH AS SULFUR, FRESH WATER, SAND AND GRAVEL. ALL OF WHICH ARE REQUIRED IN LARGE AMOUNTS BY A SHALE DEVELOPER. LAND OWNERS MUST BE COMPENSATED FOR THESE ADDITIONAL ‘MINERALS’ CONSUMED BY THE OIL COMPANY.
11 POOLING OR UNITIZATION.
THIS CLAUSE ALLOWS THE LAND OWNER TO GIVE PERMISSION TO THE OIL COMPANY TO UNITIZE OR POOL THE LEASED LANDS WITH OTHER LEASES TO FORM A COMMON PRODUCTION UNIT. SOMETIMES THESE UNITS ARE VOLUNTARILY AGREED BETWEEN OIL COMPANIES AND SOME TIMES REQUIRED BY STATE LAW TO PROTECT MINERALS FROM BEING PRODUCED IN THE WRONG WAY AND EXCESSIVE OIL AND GAS BEING LEFT IN THE GROUND (SO CALLED ‘CONSERVATION’ LAWS). LANDOWNERS PERMISSION IS REQUIRED TO POOL IF THE POOL IS VOLUNTARY. IF THE POOLING IS COMPULSORY BY GOVERNMENT ORDER, THE LAND OWNER’S APPROVAL IS NOT REQUIRED. HOWEVER, SUCH APPROVAL IS REQUIRED FOR ANY LEASED LANDS IN THE POOL THAT EXCEED THE MINIMUM COMPULSORY GOVERNMENT ORDER REGULATIONS. THIS PREVENTS THE OIL COMPANY OVERSUBSCRIBING LANDS IN THE POOL AND AVOID DRILLING OBLIGATIONS ON LANDS NOT INCLUDED IN THE UNIT OR POOL.
12 ‘PUGH’ CLAUSE’.
THE PUGH CLAUSE MEANS IF PART OF THE LEASED LANDS ARE CONTAINED IN A POOL OR UNITIZED UNIT, ANY LEASE LANDS OUTSIDE SUCH UNIT MUST CONTINUALLY BE EXPLORED BY THE OIL COMPANY OR SUCH EXCESS LANDS MUST BE RELEASED FROM THE LEASE ALLOWING THE LAND OWNER TO LEASE TO NEW OIL COMPANIES. THIS PUTS PRESSURE ON THE OIL COMPANY TO CONTINUE TO ACTIVELY EXPLORE FOR OIL AND GAS ON LANDS NOT IN A POOL OR UNIT.
13 FREE NATURAL GAS.
THIS CLAUSE REQUIRES THE OIL COMPANY TO PROVIDE FREE OF CHARGE TO THE LESSOR, A CERTAIN AMOUNT OF NATURAL GAS FOR THE LESSOR’S USE OR ASSIGN TO OTHERS.
14 FACILITIES.
THIS CLAUSE LIMITS HOW CLOSE THE OIL COMPANY CAN BUILD ITS FACILITIES TO BUILDINGS OWNED BY OTHERS. YOU MIGHT WISH TO HAVE LONGER LENGTHS IF CLOSE TO RESIDENCE OR LIVESTOCK BARNS.
15 TITLE AND INTEREST.
THIS CLAUSE ELIMINATES ANY WARRANTY OBIGATION OF THE LESSOR AS TO TITLE AND PUTS THAT RISK SOLELY ON THE OIL COMPANY. DON’T WAIVE THIS RIGHT. THE CLAUSE ALLOWS THE OIL COMPANY TO PAY FOR TITLE CURATIVE ACTIVITY BUT ONLY AFTER THE LESSOR HAS BEEN GIVEN TIMELY NOTICE TO CLEAR THE TITLE ISSUE.
16 PROPORTIONATE REDUCTION.
THIS CLAUSE ALLOWS THE ROYALTY OWNERS INTEREST TO BE PROPORTIONATLEY REDUCED IF THERE ARE OTHER ROYALTY OWNERS IN THE LEASE THAT SHARE IN THE ROYALTY
17 DISPUTE, BREACH, NO WAIVER, TERMINATION. NOTICE OF DEFAULT.
THIS CLAUSE REQUIRES THE LESSOR TO FIRST GIVE TIMELY WRITTEN NOTICE TO THE OIL COMPANY TO CLEAR UP A DISPUTE BEFORE THE LESSOR OR ROYALTY OWNER PROGRESSES WITH OTHER DISPUTE RESOLUTION PROCESSES, SUCH AS FILIING A LAWSUIT. [ARBITRATION HAS BEEN DELETED].
SEEK ADVICE FROM YOUR LEGAL COUNSEL WHAT TYPE OF DIPSUTE RESOLUTION PROCESS IS BEST FOR YOU.
EXTENSIVE LIST OF DISPUTE ISSUES ARE LISTED IN WHICH THE BURDEN OF PROOF IS ON THE LESSEE (OIL COMPANY) TO PROVE OR DEFEND.
18 SURRENDER.
THIS CLAUSE ALLOWS THE OIL COMPANY TO SURRENDER PARTS OF THE LEASED PROPERTY BUT MUST DO SO IN SPECIFIC WAYS AND FILE NECESSARY LEGAL DOCUMENTS IN THE COUNTY OR PARISH REAL ESTATE REGISTER TO CONFIRM THE RELEASE.
19 NOTICES.
THIS CLAUSE CONFIRMS OIL COMPANY AND ROYALTY OWNER ADDRESSES FOR NOTICES. BE SURE AND KEEP THIS CURRENT WITH THE OIL COMPANY.
20 MISCELLANEOUS.
HEADINGS.
MEANS LEASE HEADINGS ARE NOT PART OF THE LEGAL TERMS OF THE LEASE.
TERMS SEVERABLE AND DIVISIBLE. MEANS IF ONE PART OF THE LEASE IS DETERMINED TO BE INVALID ALL THE OTHER PARTS ARE VALID AND IN FORCE.
FOLLOW APPLICABLE LAW AND REGULATIONS.
MEANS OIL COMPANY MUST ABIDE BY THE LAWS OF THE LAND AS A PART OF THE LEASE OBLIGATIONS.
INDEMNIFICATION. MEANS THE OIL COMPANY WILL PROTECT THE LESSOR AND ROYALTY OWNER FROM ANY CLAIMS CAUSED BY OIL COMPANIES OPERATIONS ON THE LAND. MAKE SURE THE OIL COMPANY HAS FINANCIAL AND TECHNNICAL COMPETENCIES TO BACK UP THE INDEMNIFICATION.
INSPECTION, AUDIT AND REPORT. GIVES LESSOR AND ROYALTY OWNER INSPECTION AND AUDIT RIGHTS TO CHECK ON ITS RIGHTS PROVIDED BY THE LEASE. LIMITS HOW FAR THE LESSOR HAS TO TRAVEL TO DO THIS.
TAX PROVISIONS. EACH PARTY LIABLE FOR ITS OWN INCOME TAXES.
DUE DILIGENCE. GENERAL OBLIGATION FOR OIL COMPANY TO EXPLORE AND PRODUCE IN A DILIGENT FASHION AND NOT SIT ON ITS LAURELS.
ASSIGNMENT. GIVES LAND OWNER PROTECTION AGAINST OIL COMPANY ASSIGNING OR SELING ITS INTEREST IN THE LEASE TO ANOTHER THIRD PARTY. THE LANDOWNER FIRST HAS A PREFERENTIAL RIGHT OF PURCHASE. IN ANY EVENT THE ORIGINAL OIL COMPANY REMAINS LIABLE TO THE LAND OWNER IN REGARD TO LEASE OBLIGATIONS.
FORCE MAJEURE AND COMPENSATORY ROYALTY. DEFINES WHAT CONSTITUTES FORCE MAJEURE (SO CALLED ‘ACTS OF GOD’) CLAIMS THAT MAY LIMIT OR REDUCE THE OIL COMPANIES OBLIGATIONS TO THE LESSOR.
COUNTERPART EXECUTION. MEANS SEPARATE COPIES OF THE LEASE MAY BE SIGNED BY LESSOR AND OIL COMPANY AND EITHER CONSTITUTES A VALID LEASE AGREEMENT.
MEMORANDUM OF LEASE. LIMITS WHAT SENSITIVE LEASE FORM IS FILED IN THE COUNTY OR PARISH REAL ESTATE RECORDS.
SUCCESSORS AND ASSIGNS. MEANS OBLIGATIONS OF THE LEASE APPLY EQUALLY TO THE PARTIES ASSIGNS AND SUCCESSORS.
NOISE. SPECIAL CLAUSE TO MITIGATE NOISE POLLUTION CAUSED BY OIL COMPANY DURING ITS OPERATIONS.
MEASUREMENT. SPECIAL CLAUSE REQUIRING FISCAL METERING (OR MEASUREMENT OF PRODUCTION FOR DETERMINING ROYALTY PAYMENTS) OF ALL OIL AND GAS TO TAKE PLACE ON THE LEASED PREMISES.
FURTHER ASSURANCES.
GENERAL CLAUSE FOR PARTIES TO EXECUTE ANY OTHER NECESSARY DOCUMENTS TO CAUSE THE LEASE TERMS AND ITS CONDITIONS TO BE FULLY VALID AND ENFORCEABLE.
JOINT PREPARATION GENERAL LEGAL CLAUSE THAT MEANS NEITHER OF THE PARTIES CAN CLAIM THE LEASE FORM IS BIASED BECAUSE EITHER ONE MAY HAVE BEEN THE ORIGINAL DRAFTER.
SINGULAR AND PLURAL. SELF EXPLANATORY.
GENDER.. SELF EXPLANATORY.
ARTICLE, PARAGRAPH, SECTION. SELF EXPLANATORY.
INCLUDE, "include" and "including" SELF EXPLANATORY.
PUBLIC ANNOUNCEMENT. GIVES LAND OWNER SOME CONTROL WHAT IS PUT IN THE PRESS ABOUT THE LEASE.
SURVIVAL. A CLAUSE THAT PERMITS THE LEASE TO REMAIN IN EFFECT WHEN CERTAIN INVALID CLAUSES ARE DELETED.
OPERATOR. THIS CLAUSE GIVES THE LESSOR PROTECTION IN DETERMINING WHO THE OPERATOR OF THE LEASE CAN BE. SOMEONE WHO IS COMPETENT AND FINANCIALLY WORTHY.
GOVERNMENT APPROVAL. THIS CLAUSE ALLOWS FOR THE PARTIES TO OBTAIN ANY RELEVANT GOVERNMENT APPROVALS OR AUTHORIZATIONS REQUIRED TO IMPLEMENT ANY TERM OF THE LEASE. THEREFORE SUCH TERM IS NOT AUTOMATICALLY VOID BECAUSE SUCH APPROVAL IS REQUIRED. SOMETIMES THIS IS NEEDED FOR UNITIZATION OR POOLING ARRANGEMENTS.
RATIFICATION: CLARIFICATION THAT LESSOR ACCEPTING ANY LATE PAID BENEFITS FROM LESSEE (OIL COMPANY) SHALL NOT BE DEEMED TO BE AN AUTOMATIC APPROVAL AND RATIFICAITON OF THE LATE PAYMENT AS BEING IN COMPLIANCE WITH THE LEASE. THE LESSEE (OIL COMPANY) MUST OBTAIN LESSOR’S WRITTEN APPROVAL TO WAIVE ANY OF LESSOR’S LEGAL RIGHTS TO SEEK DAMAGES OR REMEDIES UNDER THE LEASE.