by Roland Tague
Even though there has been a decline in oil prices, offers are still being made to buy or lease minerals. There are even television ads offering to buy minerals. Many people who receive a letter from an oil company offering to purchase their minerals are so excited to receive the cash that they sign the document without understanding the consequences of it. As with many businesses, there are those who take advantage of someone’s lack of knowledge.
Before acting on impulse a mineral owner should investigate whether there are alternatives which would be more advantageous to them. Perhaps leasing the minerals is the better alternative, however, many people don’t understand the difference between selling and leasing minerals.
When you sell your minerals you are also giving the new mineral owner the right to occupy a sufficient portion of the surface to extract the minerals underneath and you are not entitled to any revenue from the sale of the oil and/or gas produced from those minerals.
Leasing the minerals is significantly different from leasing the surface. When you lease your minerals you will be leasing them for a specific term of years (referred to as the “primary term”) and “for as long thereafter as oil or gas is produced in paying quantities” (the “secondary term”). The consideration for the lease is paid in two parts. First, the mineral owner will receive an immediate cash payment which is called a “bonus payment.” The person leasing your minerals now has the right to drill a well at his expense. The second part of the consideration entitles the lessor/mineral owner to receive a share of the revenue from the sale of the oil and/or gas extracted from the well. The share is normally expressed in a fraction such as 1/8th, 3/16ths, or 1/4th.
There are two other important considerations before leasing or selling. The obvious one is whether the consideration is reasonable, taking into account the current market value? I always refer clients to a petroleum geologist who can analyze the activity in the area and provide an independent opinion of the amount being paid for the leases or sales of minerals. Secondly, a lawyer or other expert should review the lease agreement before it is signed. Years ago there was a standard lease form called “Producers 88.” Today’s leases follow no standard form and often weaken or eliminate the implied covenants intended to protect mineral owners; limit the remedies of mineral owners providing opportunities for companies to correct their breach; and provide a first right of refusal as to future leases after the expiration of the lease. Beware of a lease stamped “Producers 88.”
Although there is some expense involved, the benefit of advice in advance is extremely important.
For more information, please contact Roland Tague at 272-09241 or firstname.lastname@example.org.
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Posted on Fri, August 19, 2016
by Andrews Davis filed under