Mineral rights owners in Texas often lease those rights to energy companies looking to discover and produce oil and gas products. Typically, energy companies research properties thought to be good prospects and then approach the owner about acquiring a lease for the mineral rights.
Often, the lease agreement presented to a property owner is drafted by the energy company, and the provisions will very likely be more favorable to the company. Landowners need to understand their rights under oil and gas leases. With help from a Texas contract lawyer at MehaffyWeber landowners can learn how oil and gas leasing works, understand when to negotiate for fairer terms, and minimize the opportunity for disputes.
Ownership of Mineral Rights in Texas
Land in Texas has two types of ownership rights. The ‘surface estate’ refers to the ownership interest in the space above ground. The ‘mineral estate’ refers to the ownership interest in the natural resources that exist below the same piece of ground.
Surface and mineral estates are distinct ownership interests and may be sold separately. This can result in a surface owner having very different priorities than the mineral owner. Between the two types of estates, the mineral estate is dominant. Texas law says the owner (or lease-holder) of mineral rights may use the surface estate to the extent reasonably necessary to explore for, develop, and produce oil and gas.
Reasonable use of surface land can include:
- Seismic testing
- Well drilling
- Creating roads
- Building pipelines
- Water use
Furthermore, unless changed by contract or law, the only liability a mineral rights holder can have to a surface owner for damage done to the surface is if that damage is unreasonable or excessive. Surface owners who don’t own the mineral rights may not be able to do much to influence how a mineral leaseholder utilizes surface land.
The Basic Agreement Between Landowners and Oil and Gas Companies
Oil and gas leases are agreements between landowners (lessors) and energy companies (lessees). In exchange for the right to explore, develop, and produce oil and gas, the company agrees to pay a royalty to the landowner based on the amount of production.
To be considered a valid agreement, an oil and gas lease must contain the following information:
- A description of the property sufficient for it to be accurately identified
- The length of the lease
- Royalty payments for the lessor
Oil and gas leases cover two periods of time. The primary term is the initial lease term and is usually designated as a period of years. During this period, the oil and gas company is attempting to discover oil and getting ready for production. If sufficient oil is not found, the lease ends.
The secondary term begins when oil and gas are being produced and can last until there is no more production. There is often room to negotiate the length of lease terms and landowners need to be aware of how they can make the terms more favorable.
Disputes over royalty payments can arise when landowners don’t receive what was expected. Provisions concerning royalty payments should be clearly stated. The percentage to be received, the gross amount from which the percentage will be calculated, and the timing of payments can all be negotiated.
Key Considerations in Oil and Gas Leases
Oil and gas leases can be very complicated, and both parties should work with experienced legal counsel. Speaking with attorneys protects each party’s rights and results in a fairer agreement. Though oil and gas leases may contain provisions that are specific to the parties or the property, there are standard issues that most leases address.
The following items are typically included in an oil and gas lease:
Granting Clause
The granting clause addresses the extent of the ownership interest being transferred. It describes the mineral rights given by the lessor and the lessee’s rights to access the minerals. It creates obligations on the lessee to pay the lessor and on the lessor to provide access to the property.
Habendum Clause
The habendum clause is the portion of the lease agreement that states when the grant of ownership starts and when it ends. In oil and gas leases, the habendum clause addresses two time periods.
During the primary term, the lessee must meet certain requirements for the secondary term to begin. The major condition necessary to initiate the secondary term is usually that the production of oil or gas has begun by the end of the primary term.
Additional provisions, known as ‘savings clauses,’ can be included that will extend the lease into the secondary term even though the property is not producing. A landowner can negotiate some type of additional payment for agreeing to extend the lease under certain conditions.
Royalty Payments
The provision regarding royalty payments is of particular importance to the lessor as this is the primary compensation for leasing the property. Royalty payments are specified as a percentage of oil or gas production.
The terms and conditions under which royalty payments will be made can lead to disputes if not stated clearly and completely understood. Lessors should work to negotiate the most favorable timing and amount for royalty payments.
Bonus Payment
During the primary term of an oil and gas lease, the lessee is typically not required to produce oil or gas from the property. Therefore, the lessors do not receive any royalty payments. A bonus payment is an amount the lessee may agree to pay the lessor at the beginning of the lease as an incentive for the landowner to execute the lease.
Bonus payments are negotiable. The more valuable the oil and gas lease is to an energy company, the more the company will be willing to pay as a bonus amount. Land size, expected production, and marketability are all factors affecting the bonus payment.
Surface Use
Often, the mineral estate owner is also the owner of the surface estate. This person may want to have some say in how the oil and gas lessee accesses the mineral estate and conducts operations on the surface estate. Provisions in the lease can specify how and where a lessee can access the surface estate. A lessor can also require compensation for water use or certain types of damage to the surface estate.
Pugh Clause
A Pugh clause is a way to limit a lessee’s leasehold estate after the primary term of the lease. It gives a landowner back the leased land that the lessee is not using for oil and gas production. If a Pugh clause is not a part of an oil and gas lease, the lessee can control all of the leased property if there is oil or gas production on any part of it.
Pugh clauses protect landowners from losing the use of land that is not actively producing oil and gas and encourage energy companies to fully pursue all opportunities for oil and gas production within a leased estate.
Why You Need Legal Advice Before Signing an Oil and Gas Lease in Texas
Oil and gas leases allow energy companies in Texas to expand production and can be a good way for property owners to earn money from their land over a long period. However, landowners need to be aware of their rights under an oil and gas lease and make sure they are protected if things don’t go as planned.
At the law office of MehaffyWeber, our Texas oil and gas attorneys help landowners and oil and gas company clients negotiate the most advantageous lease terms. Our civil trial lawyers are skilled at resolving lease disputes and minimizing the need for costly litigation. Contact us today to discuss issues regarding an oil and gas lease.