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Oil/Gas/Lease Bonuses

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Question
I have been approached by an Oil and Gas Company wishing to Lease my MI's in Blaine County, OK 33-17N-11W.  According to NARO, there is a large range for Bonuses.  What determines the Bonus? (ie, size of MA's, RI, etc)  How do I determine which is the best deal for me?  Thanks so much for your help with this matter.

Answer
The following is taken from an article I wrote on leasing tips that appears on the THE MINERAL HUB website. The entire article can be found on the "Mineral Hub News" page. I think you will find the below helpful in answering your questions.

In my opinion it is best to lease to an actual oil and gas company who has an active interest in seeing your minerals developed rather than to someone whose main goal is to resell your lease to someone else for a profit or participate in a well for their own gain. That said, if a speculator decides late in the game to start buying leases they might be willing to pay a substantial bonus to participate in a potential well with your lease so in these cases an offer from a speculator might be worth considering as long as the terms being offered are at least as good as those being offered by the company who is likely to be doing the actual drilling.

PRIMARY TERM: When you sign a lease, you are giving the lessee (or whoever they may assign it to) the exclusive right to explore for and develop your oil and gas for a set period of time, called the “primary term”. Currently, in “active” areas the primary term is usually a period of three years, though terms can be for as little as six months or for as long as five years. In other less developed areas primary terms of ten years are still being asked for, though I would hesitate to tie up my minerals for that long without substantial compensation; the theory being that if oil or gas is discovered in an area that has not seen much activity before, the lease prices will likely rise. Locking yourself into a 10-year lease would prevent you from sharing in any increase in lease bonus price that occurred during those ten years.

NEGOTIATIONS: Negotiating the lease terms in an oil and gas lease is much like negotiating any other contract. Most, if not every part of an oil and gas lease is negotiable. Your ability to effectively negotiate provisions such as length of primary term, bonus and other things you want to include depends on your bargaining abilities, which can be greatly enhanced if you can demonstrate knowledge of the current or recent oil and gas activity in the area being leased. If you are in a “hot” area, and can show you are aware of it, you’ll likely be able to negotiate better lease terms than someone with little knowledge of the goings-on in the area. The key is to research the area prior to agreeing to lease.

QUESTIONS TO ASK YOUR LESSEE: One of the first questions I ask a landman, is how much of the potential drilling area is currently leased. In areas with a history of oil and gas production it is common for the minerals under a proposed drilling and spacing unit to have been divided between many mineral owners over the years. Knowing what percentage of the mineral owners within a proposed drilling and spacing unit have already been leased is helpful. If most of them are already leased and the landman is trying to “wrap up” the leasing you may be able to negotiate a more favorable lease.

In less active areas companies will lease entire areas of a county in hopes of developing a reservoir that looks promising to them. The same logic would apply though as with any drilling area; find out how much is already under lease if you can. If most of the section or area has already been leased; you would want to ask the question “What is the highest bonus per acre paid so far?” The more people they’ve leased, the more likely it is that they’ve paid at least one pretty good bonus to a tough negotiator. I would expect them to offer me the same bonus amount. On the other hand, if they have only started leasing, the highest bonus they may have paid could be only $50 per acre. Determining where you are in the company’s leasing process is important, since the best offers are usually made as they are trying to “wrap things up.”

Also, keep in mind that a smaller company may be willing to give you a bigger royalty share, or a shorter lease term in lieu of a large bonus. They may prefer this because they don’t have the cash available for bonuses that some of the bigger companies do. A bigger company on the other hand may be more stubborn about the actual contents of the lease, and be willing to give you a substantial bonus in lieu of a big royalty fraction or a favorable lease form. I usually try to determine the wealth and strength of a company before negotiating bonus and royalty with them. This helps me determine what to ask for in my lease negotiations, and whether I can realistically expect to get it.

I would not demand too big a bonus from a smaller company, because they may just decide to force pool me (via state forced-pooling laws) if I price myself out of their budget. I would instead try to negotiate some favorable lease clauses into the lease and/or obtain a 1/4th royalty. I also consider the production nearby and negotiate my royalty accordingly. If there are no producing wells nearby, I would not consider royalty to be as important a factor in my negotiations, though I would still not lease for a mere 1/8th.

FINAL NOTES: You should understand what you are signing before signing it obviously, and if you don’t then find someone to explain it to you. An oil and gas lease creates obligations which can last for decades and so it deserves some attention. If you don’t want to deal with analyzing the lease yourself, it would be wise to pay someone to do it for you if necessary. Many people just sign anything given to them and hope they are being paid fairly. This sometimes costs them a lot of money in the long run.

Hope this helps you out!
Frederick M. "Mick" Scott CMM, RPL
The Mineral Hub
www.mineralhub.com

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Frederick M. Scott

Expertise

Oil and gas leasing, lease negotiations, how to best deal with the oil and gas companies or their representatives, buying/selling mineral rights, forced-pooling, correlative rights, deeds and conveyances, and "post-production" costs. I am most experienced with Oklahoma properties and laws, but am able to answer questions concerning other oil and gas producing states in many cases.

Experience

I am a Certified Professional Mineral Manager (CMM) certified by the National Association of Royalty Owners (NARO) in Tulsa, OK. I am also a Registered Professional Landman (RPL) with the American Association of Professional Landmen (AAPL). I have managed my family's oil and gas properties in Oklahoma for over 10 years and have dealt with many landmen, title analysts, attorneys and other oil and gas professionals in the process. I have written several articles which have appeared in various oil and gas industry magazines and newsletters. I have negotiated and drafted leases, prepared deeds, affidavits, and other legal instruments relating to my own minerals, as well as performed title, legal research, and curative work for same. I have acquired a good deal of knowledge on the subjects of oil and gas law, mineral appraisal, and landwork over the past ten years, and also worked as a professional landman and lease buyer for a time. I've seen the business from "both sides" and therefore feel confident I can help out most of the folks who ask questions in this forum.

Organizations
National Association of Royalty Owners (NARO); American Association of Professional Landmen (AAPL)

Publications
National Association of Royalty Owners "Action Report" (ROAR); NADOA Magazine, The Mineral Hub, Landman Magazine, and several royalty owner association group's newsletters.

Education/Credentials
Certified Mineral Manager (CMM), Registered Professional Landman (RPL)

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