The Oil and Gas Lease
The oil and gas lease has long been the lifeblood of the oil and gas industry in the United States and with lands and minerals lying in oil-producing states like Oklahoma, Texas, New Mexico, and North Dakota. Oil and gas leases are a one-of-a-kind legal agreement with their own jargon, terms, and conditions, as well as their own set of basic added clauses that have evolved over time to cater to the demands of landowners and companies wanting to develop and exploit the nations mineral reserves for drilling.
Oil and Gas Companies and Leasing
When minerals are owned by a private citizen or entity, oil and gas companies must lease the minerals prior to drilling for oil and gas.
The parties negotiating the primary term for the mineral lease for the property are called the Lessor and the Lessee. An oil and gas lease is an agreement between the owner of a mineral estate (Lessor) and another party, such as a lease broker or an oil and gas company (Lessee). The lease permits an oil company (and or gas companies) to explore for and produce oil and gas resources under the lands covered by the lease.
Oil and gas leasing historically covered all mineral interests owned by the mineral rights owners, from the surface to the center of the earth, thus encompassing all formations of the leased lands, whether your lands were located in Oklahoma, Texas, New Mexico or North Dakota.
Multiple wells may now be drilled on a tract of land with rights to produce from several formations, thanks to the gas companies and their current drilling techniques. As a result, depth limitation clauses have become not only popular for the lessor in recent years on their oil leases, but a necessary clause to have added to the Oil and Gas Lease negotiated with a company with plans to drill on their property.
The Depth Clause
If you are an oil and gas mineral owner, it is important that you understand the importance of adding a depth clause in your lease, which is always in your best interest. This clause will release specific formations or deep rights on lands covered by the lease back to you after the primary term of your oil and gas lease has expired. There are several types of these clauses to choose from and they have evolved over the years as mineral owners become more educated about creating value from their oil and gas mineral rights.
Mineral owners have begun to see a number of wells being re-drilled at greater depths to access previously inaccessible formations as a result of technological advancements, particularly in the shale plays. When these untapped formations are found or become viable to drill, having your deep rights open will allow the mineral owner to offer “deep rights” for lease again.
The oil and gas company, which is the “Lessee,” would want to retain the deepest depths feasible and recommend that all depths be eligible for retention, but with a minimum down to the depth of the deepest depth drilled in any well on the lease.
The depth most favorable to the mineral owner, who is the “Lessor” would be based on the deepest perforation in the well from which it is then producing.
Another alternative is to use the deepest depth to which the production casing is set in the well. Some Lessees will want the clause to use the term “stratigraphic equivalent” — as in, “Lessee will release all depths below the stratigraphic equivalent of the deepest producing horizon in any well on the leased premises.” Oil and Gas Attorney John B. McFarland suggests in his lease negotiating checklist avoiding the use of this term if possible. It injects uncertainty into the determination of depths remaining under lease and depths released.
The method for defining the depth restriction may differ, but the goal is essentially always the same: to free a lease from any “deeper” formations that haven’t been drilled. When a shallower formation has been drilled and is held under a prior lease or leases, you may grant a second lease for the mineral owners’ “deep rights”, thereby getting to sign on the dotted line and receive another lease bonus payment in the process.
Oil and gas Attorney Robert J. Burnett of the firm Houston Harbaugh writes that “Care must be exercised in drafting the depth clause. Imprecise drafting could result in the unintended consequence of severing deeper portions of the producing horizon. For example, a description of the severance as “from the surface to a depth of 6000 feet below the surface” could create operational problems. The surface is not uniform and perfectly flat so a specific depth reference could result in an uneven severance, depending on where the surface measurement is commenced. The depth severance should therefore reference a specific geological structure and/or formation as the baseline (i.e., “100 feet below the top of the Marcellus Shale Formation”).”
Before signing as a Lessor, landowners with mineral interests in one parcel or other lands and acres spread across several counties should research the subject of the depth clause (as well as other issues you’d want to discuss with a Lessee) before allowing a drilling company to start drilling operations on their property.
If your minerals are in Grady, Stephens, or Garvin counties in Oklahoma, or Midland, Howard, or Loving counties in Texas, you are in some of the more active and prolific counties where a depth clause in your oil and gas lease could be very beneficial for creating future leasing opportunities.
Don’t sign anything to limit your mineral rights without fully understanding the lease form. Landowners can do little once an oil company has begun production on their property in order to protect their mineral rights. Oil and gas leasing requires attention to detail. I once had a friend who leased with Shell Oil out in the Permian, where newer oil and gas leases can generate thousands of dollars in lease bonus amounts and he failed to negotiate an Exhibit A with a depth clause in his oil and gas lease which ended up costing him future bonus payments and the chance of higher gas royalties as a result of negotiating oil and gas leases for deeper zones. A higher royalty for his deep rights could have generated increased oil and gas royalties on the multiple Wolfcamp wells they drilled on his lands.
The Best Depth Clause for Oklahoma and Texas Mineral Rights Owners
To find out what we believe is the best depth clause to use with your oil and gas lease, contact us for a FREE Consultation call where we will provide you with this important clause and answer any other questions you may have about negotiating the best oil and gas lease terms to protect your minerals and make the most money over time.
This article is not intended as a comprehensive list of all possible issues that may arise in negotiating leases, nor does it address all of the possible versions of these types of clauses that have been used over the years.
Before signing an oil and gas lease, a lessor is advised to consult with a skilled attorney knowledgeable in oil and gas law; it could save time and money, as well as a future headache regarding your acreage ownership. Whether you acquired your interest through mineral deeds or you inherited your minerals, get educated on oil and gas lease clauses and other topics related to oil and gas leases.
Before the parties agree to the lease conditions covering the leased premises, they should understand their ownership of mineral rights and how operations by the oil company will serve to maintain production and extend the leases they sign, beyond the primary term.
Leasing or Selling Mineral Rights
If you or your family members are considering leasing to an oil company or selling your mineral rights in Oklahoma or Texas, go visit redriverhub.com, the premier oil, and gas mineral rights platform where mineral owners can lease or sell their mineral rights. It is a site built by mineral owners for mineral owners.