The Basics of Oil and Gas Leases Part II

For those Pennsylvanians located in the Marcellus Shale area, natural gas and oil reserves are now being tapped. Many land owners want to take advantage of the Marcellus Shale development, and are signing mineral exploitation leases to that effect. Most oil and gas leases are made up of similar clauses, and many drilling companies try to maintain a standard lease. This post explains a few of the common clauses you should be on the lookout for, because they may be good or bad for you depending on the wording or your situation.

  • Clauses to begin work:Cessation of Production Clause- specifies what the driller must do to maintain his end of the lease in the event that production ceases.
    • Granting Clause- states that the person signing the lease has the right to grant use of the estate, i.e. is the rightful owner of the estate.
    • Habendum Clause- indicates the extent of the ownership rights that the owner intended to give the lessor. The right to drill, the right to extract, if so how much, how much does the lessor have to pay, etc.
    • Reworking Clause- This benefits the owner of the land, it means that if the driller fails to find oil or gas on the first try, he or she may re-drill to find a production hole. It also means that multiple areas of your land may be drilled on, something some landowners are not amenable to.
    • Delay Clauses (clauses that allow the driller to delay work and still be in compliance with the lease):
      • Unless Clause- states that the lease terminates on a fixed date UNLESS the driller puts in a well or  pays a predetermined rental fee.
      • Or Clause- the driller must drill OR pay rental fees. This is different from the “unless clause” because the driller must then surrender the lease if there is no drilling and no rental paid. There is no set date to end the lease.
      • Savings Clauses (protects the individual leasing the rights, so that they may continue work)
        • Dry Hole Clause- allows the driller to continue drilling or reworking after a dry hole is drilled.
        • Continuous Operations Clause- gives the individual leasing the mineral estate the opportunity to continue working for as long as oil or gas production continues on the land.
          • Some leases allow this and the drilling of additional wells to show continuous operation
          • Some leases allow the driller to complete whatever work on a well has been done in order to see if there can be exercise of the continuous operations clause
  • Pooling Clause- combines small tracts of land and the mineral leases to drill a single well for production. This allows smaller land owners to use oil and gas leases, and also makes the drilling more efficient and (hopefully) easier on the environment. The variations on the pooling clause are:
    • Pugh Clause- modifies the pooling clause so that where possible, a driller must put in a well that would not be pooled with other lands, and therefore that landowner can have more oil or gas produced on his or her lands.
    • Unitization Clause- this clause attempts to combine the use of multiple wells and leases so that an entire field can be worked on without damaging the rights of others (landowners or producers)
    • Entirety Clause- provides apportionment of royalties if the owner of property anticipates a subdivision of the mineral lease (the driller allows others to take over drilling on part of the property) and this protects the owners royalties.
    • Force Majeure Clause- relieves the driller of complying with the terms of the lease if the failure to perform occurs because of some natural disaster, inability to work, or other destructive force. The approved forces are listed in this clause.

These are some of the most common clauses found in oil and gas leases. When looking at your lease, be aware of how subtle shifts in wording can change a clause that normally favors you, into a clause that favors the other party. Leases should be carefully drafted by experienced attorneys and should reflect the desires of both parties. Do not sign a lease without consulting an attorney.

For more reading on the mineral estate, see my post here. Contact Shannon K. McDonald to have your lease reviewed or to begin a discussion of how to utilize the oil and natural gas deposits you may have on your land. Also, next in this series is a discussion of royalties and production, what the words mean and how they will affect you.

The Basics of Oil and Gas Leases: Part I

Exploitation of oil and gas is going through a rebirth in Pennsylvania today, and many attorneys and individuals are new to the field and treading on uncertain ground regarding what they should and should not accept in a lease. Certain things, like royalty payments, are more fact specific, and general advice about that clause depends on land specifications and the location of the reserve the landowner situated on.

In this first post in the oil and gas series we’ll determine what basic things you should know prior to entering an oil and gas lease, especially in Pennsylvania, where much of the legal territory has been unregulated for 100 years.

First, many people don’t know that every plot of land begins with two separate estates (sets of ownership rights), a surface estate and a mineral estate.

  1. A surface estate, which allows use and exploitation of the surface area and the area above it to a reasonable point. An example would be placing your house, your farm, and a windmill on your property: then you are using the surface estate.
  2.  The mineral estate gives use and exploitation rights to all minerals under that piece of property. This would include the right to mine for coal or gold, and drill for gas and oil.

These two estates are both included in your land parcel, unless they have been severed at some point. As the country expanded west it was common for developers or even the states themselves to retain the mineral estate. For most Pennsylvanians, unless the mineral estate was sold by a prior owner, the landowner is probably the owner of both estates. A title attorney can check for full or partial ownership of the mineral estate.

The fact that most Pennsylvanians still own their mineral estate, gives the individual more control over the decisions for a lease. Although you will feel a lot of pressure from neighbors or the company attempting to lease your mineral estate, you should be cautious when accepting the terms of a lease and always consult an oil and gas law attorney.

You should be exceptionally careful if approached about outright selling your mineral estate, as that removes the right to valuable royalty payments for yourself and future generations. When it does come time to divide your estate, you may divide the ownership interests in the mineral estate, just as you would in the surface estate. However, you must be careful because when you do this, because it severs the mineral estate from the surface estate.

The division of the two estates creates an undivided interest in the whole of the mineral estate. So, where a person gives the mineral estate to her two children, each child owns half of the mineral estate, but niether can point to one half of the property and say, “That’s MY half of the mineral estate!”

One of the children is free to subsequently sell his half, or sell one quarter and retain one quarter. The effect of the sale, and the conveyance of a mineral estate, requires extremely precise language. Any ambiguous statements will not be used to your advantage in court-and a mistake in an oil and gas conveyance can be very costly!

In the next post we will discuss some of the more common clauses in leases, and what effect they have on your mineral estate and your rights. Although this portion makes mention of Pennsylvania, and I am only licensed to practice in Pennsylvania and Wyoming, the information in the second post in this series is broad and merely informative; it is not intended to be state specific.

Shannon K. McDonald studied oil and gas law while in school in the state of Wyoming. Wyoming has a thriving oil and gas industry, and has been regulating the exploitation of minerals while preserving the rights of individuals and the beauty of the land for twenty years. While in Wyoming, Shannon K. McDonald learned some of the nuances of the leasing system and how to negotiate and form oil and gas leases to benefit the landowner.

Contact Shannon K. McDonald for assistance with your mineral leasing situation today.