Oil and Gas Lease Negotiations
For an oil and gas landowner in West Virginia and Ohio, nothing is more important than obtaining the best deal possible in their oil and gas lease negotiations. In order to accomplish the highest compensation and a deal on your terms, you need the best oil and gas lease lawyer on your side. The oil and gas attorneys at Gold, Khourey & Turak can help you. Need help? Get help. Get GKT.
Why? The Marcellus Shale and Utica Shale boom has made many West Virginia and Ohio landowners millionaires. In fact, it’s estimated that the Marcellus Shale is the second largest natural gas reserve in the world. It’s no big surprise then that, for many landowners, their oil and gas minerals are the most valuable asset they own. Just how valuable that asset is depends on a variety of factors and circumstances.
Oil & Gas Lease Term Details Are Important
Without a doubt, the greatest factor is the terms of the landowner’s oil and gas lease. If the terms of an oil and gas lease are favorable to the landowner, it can mean thousands if not millions more in their pocket—and not the oil and gas company’s pocket.
But it’s not just about money when it comes to oil and gas lease negotiations. The typical oil and gas lease permits the company to use a landowner’s property to construct well pads, pipelines, roads, and other facilities. Negotiating an oil and gas lease to protect your property and way of life can be just as important as the money.
The reality is that the issues and potential pitfalls that exist in the oil and gas company’s lease are many and can have devastating consequences if not addressed in oil and gas lease agreements. However, there are still landowners that choose to negotiate with the oil and gas company and sign an oil and gas agreement without first speaking with an oil and gas lawyer from our office. From time to time, we will receive frantic calls from landowners about oil and gas activity on their property, claiming that their agreement doesn’t allow that activity to occur and asks us for assistance to stop it. Unfortunately, after reviewing their oil and gas agreement, many times we discover that the landowner did provide the oil and gas company the right to perform such activity, and without compensation. We cannot turn back the clock. Once you sign the contract, there is nothing we can do to undo the signing of that contact. That’s why it’s so important to have an experienced oil and gas attorney on your side with the knowledge and experience necessary to obtain an oil and gas lease on your terms. The oil and gas lawyers at Gold, Khourey & Turak have been representing landowners in oil and gas lease negotiations since the beginning of the oil and gas boom in West Virginia, Ohio, and Pennsylvania. Our oil and gas lawyers have in-depth knowledge of the industry and fight for the very best deal for our clients, meaning not only do we seek to provide you with the highest compensation possible, but we also provide you peace of mind knowing that there are no surprises you need to worry about in your oil and gas agreement. GKT’s oil and gas lawyers have obtained millions of dollars in lease bonus payments and royalties for our clients. We know how to maximize the value of your oil and gas minerals and protect you, your property, and your way of life. If you’ve been contacted by a landman to negotiate an oil and gas lease, the oil and gas lawyers at GKT can provide immediate assistance. GKT’s oil and gas lawyers are available 24 hours a day and can be contacted by calling or texting (304) 845-9750, by Live Chat at GKT.com, or online. Need help? Get help. Get GKT.
About Gold Khourey & Turak Oil and Gas Lease Negotiations
Since 2005, hundreds of landowners and their families have trusted GKT’s oil and gas attorneys to negotiate their oil and gas lease. That’s because GKT’s oil and gas lawyers get results and have obtained hundreds of millions of dollars on behalf of their oil and gas clients.
Our lawyers understand that the goal of every oil and gas lease negotiation is to put more money in the pockets of our clients through our representation. That’s why our oil and gas lawyers don’t just “review” leases—our oil and gas lawyers fight for the very best oil and gas lease terms possible for our clients.
At GKT, oil and gas lease negotiation consultations are always free and without obligation. All oil and gas lease negotiations are handled on a contingency fee basis—meaning our fee is a percentage of the per acre bonus we fight for and nothing from royalties.
At GKT, our oil and gas clients always come first. After all, our oil and gas lawyers live in the communities in which they serve. Thus, our clients aren’t just clients—they’re our neighbors, friends, and family. Moreover, each of our oil and gas clients are unique and deserve individual attention and prompt communication. You can count on us to be there for you and your family. When you need legal help, ask your friends and neighbors about us. Our oil and gas lawyers are licensed to practice in West Virginia, Ohio, and Pennsylvania.
What is an Oil and Gas Lease?
An oil and gas lease is exactly what it sounds like. The lessor (i.e. the landowner) leases their property to the lessee (i.e. the oil and gas company) to produce oil and gas.
The oil and gas lease states what the company can produce, how they can produce, when they can produce, and much, much more. Perhaps most importantly, the oil and gas lease states how the proceeds of production are to be shared between the landowner and the company. The simple truth is though that each and every term is important.
It is vitally important that oil and gas lease negotiations address the entire lease and not just the bonus amount or the royalty rate.
What are the Most Important Oil and Gas Lease Terms?
Again, each and every term in an oil and gas lease should be addressed in negotiations in some way. They all mean something and can potentially impact your life in a variety of ways. It’s important to understand these terms and what they mean in practice. The unwise landowner who attempts to negotiate an oil and gas lease on their own without talking with our oil and gas lawyers is setting themselves up to lose potentially millions of dollars and the use of their property. Our oil and gas attorney and partner, Christian Turak, is dedicated to representing landowners and our oil and gas clients. He only handles oil and gas, and you can trust that Christian will provide you with the best oil and gas lease negotiation for you and your family.
Below are some of the more important oil and gas lease terms:
The Granting Clause
The granting clause is usually up front and center on any oil and gas lease. These are the words where the lessor grants the right to produce oil and gas to the company. The granting clause is usually very long and contains a mouthful of words. It’s often hard to parse and truly understand everything that is actually be granted to the oil and gas company.
Reading the typical granting clause closely often reveals that the landowner is granting basically unrestricted use of the surface of their property to the company for oil and gas activities. That can mean the construction of well pads, pipelines, roads, and other facilities, including compressor stations.
Moreover, the typical granting clause also leases all the landowner’s oil and gas and other minerals. That means two things. One, the oil and gas company has the right to your “other minerals” and not just oil and gas. Two, the oil and gas company leased everything from the surface of the property to the center of the earth.
Primary Term and Extended Term
The typical oil and gas lease in West Virginia, Ohio, and Pennsylvania is what is referred to as a 5 + 5 lease. That simply means that the lease has a primary term of 5 years, and the oil and gas company has the right to extend the primary for another 5-year period.
The primary term is the time in which the oil and gas company has to “commence operations” for the production of oil and gas. If not, the oil and gas company can extend the oil and gas lease for an additional 5 years or the lease expires upon its own terms.
Whether a 5 + 5 oil and gas lease is in the best interests of a landowner must be investigated. If not, it should definitely be addressed in oil and gas lease negotiations.
Commencement of Operations
One of the most important terms in any oil and gas lease is the commencement of operations language. Unfortunately, when landowners attempt to negotiate their oil and gas lease, this term is rarely addressed.
The commencement of operations term states under what circumstances an oil and gas company can hold an oil and gas lease past the primary term or any extended term. The typical oil and gas lease states that an oil and gas company may do so when it has “commenced operations” or by use of some other vague language.
Why does the typical oil and gas lease not clearly define what is meant by commencement of operations? It’s meant to be vague so that virtually any activity, no matter how slight, can be deemed sufficient to hold the oil and gas lease.
If the commencement of operations language is not negotiated in favor of the landowner, it can lead to very difficult situations. Oil and gas companies have argued that anything from applying for a permit to surveying to staking a well pad site is considered “commencement of operations.” When that happens, actual production can be years away, and the landowner will miss out on another bonus payment.
When negotiating an oil and gas lease, the commencement of operations term must be considered a priority.
Royalty Rate and Royalty Language
For the vast majority of landowners, there is no more important term than the royalty clause of an oil and gas lease.
The royalty clause contains the percentage of royalties due to the landowner for the oil and gas produced. Most states have a minimum royalty of 12.5%, but a good lease negotiation can result in royalty rates over 20% in West Virginia, Ohio, and Pennsylvania.
The royalty rate is often a hotly negotiated term of any oil and gas lease. Understanding how much leverage a landowner does or does not have in an oil and gas lease negotiation is key to obtaining the best royalty rate possible.
Just as important, if not more, than the royalty rate is how royalties will be paid.
First, will the royalty be paid with or without deductions for post-production expenses? The typical oil and gas lease permits a litany of deductions that can significantly reduce the royalties a landowner would otherwise receive—sometimes as by much as 20%, 30%, or 40% or more. Oil and gas companies have attempted to deduct landowner royalties through affiliate sales or other means. Other times an oil and gas company will attempt to satisfy a landowner’s concerns by including a “market enhancement” clause, which expressly allows for some deductions but not all.
That’s why having “no deductions” or “gross proceeds” language in an oil and gas lease is very likely not enough to protect a landowner’s royalties. Protecting against affiliate sales and other opaque practices is key to obtaining a true gross royalty.
Second, will the sales price for which the royalties be calculated be the actual sales price or an in-basin price? Many oil and gas companies in West Virginia, Ohio, and Pennsylvania transport produced oil and gas to far away markets in New England, the Gulf Coast, or other parts of the country or even to international markets.
Oil and gas companies do this in order to obtain better sales prices. Landowners want the benefit of these higher sales prices, but the companies want to pay royalties based on a substantially lower in-basin sales price. So, a landowner may have a true gross royalty clause, but lose thousand or millions of dollars because of in-basin pricing over the lifetime of production.
All landowners understand that they need to negotiate the royalty term of their oil and gas lease. However, the truth is that virtually no landowner understands how to do so—it’s much, much more than just asking for a higher royalty rate and a “no deductions” lease. The precise language of the royalty term of an oil and gas lease can be worth millions of dollars to many landowners in West Virginia, Ohio, and Pennsylvania.
Shut-In and Delay in Marketing
The shut-in or delay in marketing terms of an oil and gas lease agreement allow the company to stop production (i.e. shut in a well) without having to forfeit the lease. There are many reasons why an oil and gas company may shut in a well. For example, a company may stop production when prices are too low to make a profit.
The shut-in or delay in marketing term also states under what circumstances the company is required to pay a shut-in royalty and in what amounts. Oil and gas lease negotiations should address for the cumulative and/or consecutive months a well may be shut-in and increase the amounts due in the event a well is shut in.
Pooling or Unitization
The pooling or unitization term of an oil and gas lease allows the company to “pool” or unitize a landowner’s property with adjoining properties to form a production pool or unit. The creation of a pool or unit is necessary in order to efficiently produce oil and gas by way of fracking or horizontal drilling. Pools or units can be as small as a couple hundred acres or be well over 1,000 acres in size.
Under certain circumstances, landowners may want to negotiate a maximum unit size restriction or other restrictions into an oil and gas lease to protect against royalty dilution.
Moreover, while Ohio and Pennsylvania have forced pooling laws that allow a company to pool or unitize a property without the landowner’s consent, no such law currently exists in West Virginia. In 2020, the West Virginia Supreme Court ruled that there are no implied pooling rights. That means an oil and gas company must have a pooling term in the lease in order to pool or unitize.
Thus, in West Virginia, when a company seeks to frack under an old oil and gas lease that does not contain a pooling or unitization term, it must obtain a pooling modification. This is great news for West Virginia landowners as it allows them the ability to re-negotiate the terms of older oil and gas leases and obtain a new bonus payment.
Arbitration
Another extremely important term of an oil and gas lease is the arbitration term. Almost all oil and gas leases contain an arbitration clause these days. When a landowner has a dispute with the company involving the oil and gas lease, the arbitration term forbids them from suing the company through the normal legal system. Instead, the landowner must commence an arbitration proceeding.
Arbitration proceedings are expensive. Typically, there are three arbitrators—one appointed by the landowner, one by the company, and a “neutral” third appointed by the other two arbitrators. These arbitrators act as judge and jury and are not bound by law or procedure.
Moreover, arbitration is very expensive. Starting a proceeding can cost thousands of dollars right from the outset. The costs for the arbitrators’ time are also split by the landowner and the company. Each arbitrator can charge $300, $400, or more per hour.
A landowner should also keep in mind that oil and gas companies are involved in arbitration proceedings with some frequency. They know the arbitrators, and the arbitrators want to be appointed in future cases. That is a fact that cannot be ignored.
Simply put, oil and gas companies use arbitration clauses to protect themselves from valid claims landowners may have against them. Unfortunately, it works.
The truth is the great majority of landowners do not know the consequences of signing an oil and gas lease with an arbitration clause until they’re involved in a dispute. It’s only then that they realize the ramifications of not having negotiated an oil and gas lease that did not have an arbitration clause.
Oil and Gas Lease Bonus Payment
The bonus payment term of an oil and gas lease is almost always a per acre payment for signing the lease. It is usually paid within 90 to 120 days of signing an oil and gas lease.
At the outset of the Marcellus and Utica boom, many landowners signed oil and gas leases providing for a bonus of $5 per acre. Since that time, things have changed dramatically. Oil and gas lease bonuses have approached $10,000 per acre in West Virginia, Ohio, and Pennsylvania.
It’s important to remember that there is no going rate for lease bonuses. Bonus payments can vary quite a bit due to a variety of factors—geography, topography, a company’s development plans, the price of gas and natural gas liquids, legislative concerns, etc. To understand what bonus payment a landowner may be able to obtain through negotiation requires research into all of these factors and more. Without doing so, a landowner is only setting themselves up for failure.
Also, lease bonus payments are different than delay rentals. Whereas lease bonus payments are “paid up” for the primary term of the lease, delay rentals are typically yearly payments. The key distinction is that delay rentals are not guaranteed. If the company commences operations or otherwise holds the lease by production, it does not have to pay any further delay rentals.
How to Negotiate an Oil and Gas Lease
At GKT, our oil and gas team handles all aspects of oil and gas lease negotiations and is in constant communication with the client. Importantly, no decision, counter, etc. is made without discussion with the client and their authorization.
The oil and gas lawyers at GKT have developed a step-by-step approach to maximize the value of our clients’ oil and gas and obtain the very best deal possible.
Step 1: Research, Research, Research
Before doing anything, GKT’s oil and gas lawyers research the property to be leased. There is no substitute for putting in the time and effort to do a thorough job. The research reveals how much leverage our oil and gas lawyers may have in an oil and gas lease negotiation.
Some topics to research include:
- Location: where is the property located and what oil and gas activity is happening in the area. Consulting with state well maps and GIS maps as well as the recorder’s office can yield important information.
- The Company: GKT’s oil and gas lawyers are always negotiating with the company’s operating in Ohio, West Virginia, and Pennsylvania. They know the focus of different companies, where their priorities lie, what they may be more or less willing to give in a negotiation, etc.
- Development Plans: how does the property fit into a company’s production plans? Is the property at the beginning of a horizontal portion of a well or towards the end? Is the property integral to their production unit or something that may be “cut out”? When is drilling slated to start? While state permitting information can be helpful, our oil and gas lawyers have additional knowledge about the company which is of immense value that benefits our client during oil and gas lease negotiations..
At the end of the day, the research will guide how an oil and gas lawyer will approach a lease negotiation. The best oil and gas lawyers will look for each and every opportunity to use this research to their client’s advantage.
Step 2: Negotiate Key Terms
Some oil and gas lease terms are more important than others. For some, such as royalty rate and language, the company will fight tooth and nail to obtain the very best terms it can. On the flip side, negotiating a “no storage” term into the lease is as simple as just asking.
The point is to identify what is most important and what may cause an impasse. If the landowner and oil and gas company will never agree to royalty language, there’s no reason to discuss how much shut-in royalty will be paid or whether an oil and gas company can use a landowner’s water.
From our oil and gas lawyers’ years of experience, the following key terms should be discussed first and foremost in isolation:
- Bonus payment amounts
- Royalty rate
- Royalty language (gross royalties without deductions)
- Surface use (if the landowner owns the surface)
- Arbitration (no arbitration)
- Horizontal Pugh and Vertical Pugh (if applicable)
At this stage is where the real oil and gas lease negotiations come into play. Some landowners believe that it’s just as easy as “starting high” and seeing what happens. In our oil and gas lawyers’ experience, that’s a high-risk strategy that often ends in disaster.
Oil and gas companies will walk away from negotiations if they believe the numbers are unreasonable. A landowner could have had a good deal, but they lost it by shooting too high. On the other hand, our lawyers have experienced situations where landowners believed they were “shooting high” but in reality, significantly undervalued their oil and gas lease.
Assuming the parties reach a preliminary agreement on these key terms, the next step is to propose comprehensive changes and additions to the proposed oil and gas lease.
Step 3: Negotiating the Addendum
The final step of the process is to draft a proposed lease addendum to send to the oil and gas company. An addendum is a separate document that supersedes and controls over the terms of the base oil and gas lease. For example, if the base lease states that the royalty rate is 12.5%, the addendum will state that that rate is deleted and replaced with whatever royalty rate the parties agreed to in step 2.
The addendum should be signed by the landowner and the oil and gas company and explicitly made a part of the oil and gas lease itself. Failure to do so could result in an oil and gas company claiming it has limited or no force and effect.
In any event, the addendum should be a comprehensive document outlining all changes and additions the landowner wants. An important term that should be added is a Pugh clause. A Pugh clause states that any acreage not included in a production unit or pool at expiration is released back to the landowner to lease again. It protects against an oil and gas company including a few acres of a much larger parcel in a production unit or pool and holding the entire parcel.
For example, if an oil and gas company includes 1 acre of a 100-acre parcel in a production unit or pool, the lease will maintain in effect to all 100 acres even though the landowner’s remaining 99 acres are not being produced. In essence, a Pugh clause ensures that an oil and gas company cannot hold acreage hostage.
Other documents that should be negotiated during this step may include the memorandum of oil and gas lease, the order of payment, or other documents.
Beware of the Oil and Gas Company’s Lease Addendum Terms!
An extremely common mistake many landowners make is accepting the oil and gas company’s lease addendum terms.
For example, a landowner may tell the company landman that they want a gross royalty without deductions. Oftentimes, the landman will say “no problem,” and come back with a royalty addendum terms that uses the not-so-magic words “no deductions” and “gross royalties.” However, it’s extremely unlikely that any company-written royalty term will permit no deductions and gross royalties based on the actual sales price. It may permit affiliate sales to indirectly take deductions or permit an in-basin sales price that can be significantly lower than the actual sales price. That difference can easily mean millions of dollars for many landowners.
Another common example is a company-written no-surface addendum term. However, that term may state that there is no surface use without a separate written agreement but then go on to state that consent to surface use may not be unreasonably withheld, conditioned, or delayed. It could very well be the case that any withholding of consent may be considered “unreasonable” by the oil and gas company. In those cases, the company sometimes enters onto the landowner’s property without the landowner’s consent.
The point is, when negotiating an oil and gas lease, you can’t rely on the oil and gas company to draft the language. Their goal is to get the very best deal for themselves—not the landowner. Not everything is what it appears to be! You need someone on your side looking out for you, and your best choice is the oil and gas law firm of Gold, Khourey & Turak.
What does it Cost to Hire an Oil and Gas Lawyer?
At GKT, our oil and gas lawyers only work on a contingency fee basis. That means if our lawyers are not successful in obtaining a deal acceptable to you, there is no fee charged.
For oil and gas lease negotiations, the fee is a contingency of the upfront bonus payment. There is never a fee taken from any royalty payments, extension payments, or any other payments of any kind. It’s a win-win situation.
Do Oil and Gas Lawyers Have Free Consultations?
At GKT, consultations with a member of our oil and gas team are always free and without obligation. Before/after hours, weekend, virtual, and in-home consultation visits are available.
To schedule a free consultation, call or text (304) 845-9750 or complete our consultation form or Live Chat with us at GKT.com. Landowners can reach a GKT representative through any of these methods 24 hours per day.
Oil and Gas Lawyer Christian E. Turak
Christian E. Turak is a partner at Gold, Khourey & Turak and leads the firm’s oil and gas practice. He dedicates almost 100% of his practice to representing landowners with oil and gas issues.
Christian has represented hundreds of landowners in West Virginia and Ohio in lease negotiations. He was an integral part of building and negotiating several oil and gas leasing landgroups that delivered hundreds of millions of dollars in bonus payments and royalty payments to landowners throughout the Ohio Valley.
Our Oil and Gas Lawyers Get Results
GKT’s oil and gas lawyers understand that results are what matters. That means putting money in our clients’ pockets, after our fees are taken into account.
Our oil and gas lawyers bring value to our client’s lease negotiations. The goal is always to maximize the value of a lease negotiation and do everything possible to obtain the very best deal possible.
That’s the GKT difference.
At GKT, a consultation and case review with one of our oil and gas lawyers is always free and without obligation. Our attorneys work on a contingency fee basis which means we don’t charge a fee unless we obtain results for you.
If you have property available to lease in West Virginia, Ohio, or Pennsylvania, contact GKT’s oil and gas lawyers today. We are available 24 hours per day by phone or text at (304) 845-9750 or by Live Chat or online form at GKT.com. Need help? Get help. Get GKT.
