Expert: Frederick M. - 6/20/2009

Question
We have been offered an oil/gas lease for our 9 acre land in lenawee county, MI. Having read the lease and doing some research with the answers here and elsewhere i have a couple of concerns: i dont want to lease my land ad infinitum.

A. primary term of lease. original offer sounds like they can have the land ad infinitum so long they "operate" every ninety days. i am happy to let them explore etc but I want an explicit termination stated (not allowing for this 90 day loopwhole of operations). obviously i can accept the unless oil is produced.

B. the period of shut in well sound tricky too. they offer $1/acre/year to keep well shut. is this logical. can one ask for more? again i dont want them to keep the shut in well for ever with $10.
i want them once they find oil to have it drilled and produced at most within 2 years otherwise the lease terminates.. which clauses should i look out for and incorporate this request.

lastly, they are giving me 50$/acre as signing bonus. when i asked for more, he said this is a community thing. i know that by the lake they have given $100. i am couple miles from the like but next to a US-12.  

Answer
Jess, the "operations" must be reasonable, and not merely done to hold the lease "forever." If they abuse this clause you could certainly take them to court; but they probably won't abuse it to that point. They just want to be sure that if they start a well, even if it's near the end of the primary term, that they'll be able to finish it without the lease expiring on them. They are also given a "reasonable" time to drill additional wells even if the first one stops producing. They must "diligently pursue" operations to reestablish production however.

$1 per acre shut in kind of "sucks" I'll admit, but it's pretty standard and not often a problem as most wells aren't shut in long enough to trigger the clause, though with prices down that may be becoming more common. I've asked for $25 per acre and gotten it, but with only nine acres I'm not sure how you'll fair requesting this. I wouldn't worry about it too much. I'd worry more about the lease royalty and bonus.

Ask for the $100 or tell them (nicely) that you won't lease (unless you really need the money now.) Tell them that "by the lake" leases are going for $100 and you will lease for that amount, but not for just $50. You might instead ask for a higher royalty if they won't go for more bonus money.

A few of clauses that I would insert into the lease if it were MY lease would be:

DEPTH CLAUSE: In the event this lease is extended by commercial production beyond its primary term, then on such date this lease shall terminate as to all rights one hundred feet and more below the stratigraphic equivalent of the deepest producing perforations in the well or wells located on the leased premised, or land unitized therewith. If the lessee is in the process of drilling or completing a well at the end of the primary term of this lease, this clause shall become effective upon conclusion of such operations.

and..

SHUT-IN ROYALTY: After the end of the primary term, this lease may not be maintained in force solely by reason of the shut-in royalty payments, as provided for in this lease, for any one shut-in period of more than two (2) years or for shorter periods which exceed two (2) cumulative years.

FAVORED NATIONS CLAUSE (BONUS ONLY): In the event Lessee pays a bonus amount greater than the amount paid to Lessor, for an oil and gas lease, and/or pooling action, in this section within one (1) year from the date hereof, Lessee agrees to pay to Lessor the difference between the bonus amount already paid per acre, and the amount per acre of the greater bonus paid.

You may or may not be able to get these clauses included in your lease. Also, I must point out that I'm not an attorney myself and so before you go using these in your own lease you should probably consult with one to be sure they "fit" your situation.

The advice given on this Website is free advice, and though I believe it to be accurate, I would still suggest running it by an oil and gas attorney first. I realize they are pretty hard to find these days (they're all working for the oil companies!) but do your best or just be sure of yourself before inserting these clauses into your lease.

Hope this helps you out.
Frederick M. Scott CMM