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Constructing Oil, Gas Lease Agreement

December 8, 2012
p43 Before You Sign On the Dotted Line 1
It’s a good idea to visit a drilling site and a working well to get a perspective of the project and the implications for your land.  

Tips for constructing an oil or gas lease agreement

You’ve heard the gossip at the grocery store. You’ve seen the headlines in your local newspaper. The oil and gas companies are coming to town. Signing up for a lease seems like an easy way to boost your bottom line, but at what cost to you and the future of your farm? Here are some things to think about before you sign on the dotted line.

Education. Before signing a lease, take some time to visit a couple of well sites for a visual perspective of their size and scope, encourages Eric Johnson, an attorney and partner with Johnson & Johnson Law Offices, based in Canfield, Ohio.

"You need to have a picture in your mind of what these sites look like and how big they are," Johnson contends.

He says farmers can expect, in a best-case scenario, a minimum of 10 acres to be taken out of commission if a well is placed on their property.

To boost their knowledge about the oil and natural gas industry, Johnson also advises farmers to go online to read articles and check out other land owners’ experiences on YouTube.

Know the language. "Probably the biggest mistake I see is not understanding the lease," notes attorney Ronald Coyer of S.R. Law in Slippery Rock, Pa.

"I always try to go through an education process with clients and walk them through the entire lease line by line," Coyer says. "Here’s what the lease means, and here’s how it affects what you’re doing—because it can have some effects."

Coyer says to carefully review any protective terms. Ask yourself: What rights does the oil or gas company have? What can you as a landowner do? How does this affect my land? How does it affect the resale value? Can I keep the oil and gas rights if I decide to sell the land?

Cost and no-cost leases can be particularly confusing to muddle through. A cost lease means the oil or gas company can charge you a certain percentage on your royalties for production costs.

"A lot of these leases are written in a manner that if you’re not used to understanding and reading them, you could read it and believe they can’t charge you anything," Coyer says.

He says another item to watch for is the Pugh Clause, which states that once a land lease’s primary term expires, the oil or gas company must release any acreage that isn’t in production.

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FEATURED IN: Farm Journal - December 2012

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