Parts of an Oil Lease

There are a few major parts to each Oil Lease, and many minor parts. In particular, there are three major parts that need careful consideration before signing. They are:
Lease Term

In short, this is the time period in which the lease is valid. The term can vary between 1-50 years, but in general it is 3-5 years. Depending on the specific leasing document, Drilling operations usually will have had to start before the expiration of this time period, and drilling operations will have to be continual until either a completion or an abondonment. If the Lease is a “Paid-Up” lease, then the lease is only enforceable for the stated term, and cannot be extended without additional agreements. If however the lease allows for “delayed rentals”, then the lease will have a primary term, within which drilling operations must begin, or the leasing party must pay a delayed rental if it chooses to extend the lease. For example, a lease will state that drilling operations must commence within 1 year of the date the lease was entered, or the lease will terminate, unless an agreed sum is paid to the lessor. This delayed rental must be paid on each subsquent anniversary date of the primary term whenever drilling operations or production are inactive.


Royalties are the portion of produced substances that goes to the mineral right owner. This will be based off of market price, income, or proceeds in kind. Royalties traditionally vary from 1/8 (12.5%) to 1/4 (25%). This significant variance is determined by: Distance to nearby production, nearby production amounts, geophysical data (seismographs, geologic trends, electromagnetics, etc), and going rates of other leases in the area. A landowner might get a wonderful value for a 12.5% royalty lease in a “wildcat” area whith no nearby production, whereas in a proven high production area, he/she should be able to negotiate a 25% royalty on their lease.

Bonus Payment

Another major part to consider is the “Bonus Payment”. This is the dollar amount paid to the landowner at time of signing the lease offer. On a “Paid Up” oil lease, this amount will be significantly greater than for a “Delayed Rental” type lease. The lease term can also greatly affect the amount given for the bonus payment. This amount will vary between $5-$30,000 an acre and depend on the same things that the royalty payment depends on, namely geology, proximity, and going rates.
The better informed a landowner is on his/her property, the more negociating power he/she possesses. It is in the very nature of the “Landmen” to negotiate the best deal possible, and thus many times they will send many lowball offers before sending a competitive offer. A landowner who has been properly helped and tutored will be much better prepared to understand what constitutes a competitive lease offer.
Always keep in mind, that the most financially successful oil and gas leases come in the form of royalties paid to the landowner. Often times large bonus payments will be paid in exchange for lower royalty payments. Though this might be good in the short run, if the property is drilled and significant amounts are encountered, small changes in the amount of royalty percentage could lead to huge changes in the amount of income. Ultimately it is in the Landowners best interest to negotiate with incentive to drill, and many drilling projects from leases that were signed in July (when oil/gas prices were highest) are now stagnant. Chesapeake for example has recently announced that they are currently trying to re-negotiate a big portion of their leases because the terms that they agreed to are no longer feasible. The high royalty rates are not economically feasible given the lower oil/gas prices of the troubled market of today.

Lease Values Continued

Let me expound a little bit on lease values. While lease offers accross the board have gone down both in number, and in value, there are reasons for optimism. This is a very tepid time for many smaller oil and gas companies who are adopting a wait and see approach. These are the companies who are small enough to start and stop projects fairly quickly. If things go wrong in the short term for these companies, they might go out of business, and because of their short term approach, lease offers will be less competitive from this group. From Bigger more established oil and gas companies like Newfield, Petrohawk, Anadarko, XTO, Cheasapeake, E.O.G., etc… Lease offers will remain competitive because of the long term approach these companies have. Fresh off of periods full of windfall profits, many of these larger and intermediate sized companies continue to look for promising properties to add to their holdings and will pay what they have to for properties they want.

Lease Values

We are seeing a drastic reduction in the price and royalty offers on new leases. This can be expected because of the massive price hemorrhaging that has taken place with the price of oil since July. In July, oil hit an all time record of $147 per barrel while Natural Gas was at $13.50/MM Btu. As of this posting, Oil is at $46.79/barrel and Natural Gas is at $6.35/MM Btu. Quick math shows us that oil is 32% of what it was just 5 months ago, while Natural Gas is 47% of its recent high. Many people have asked my opinion as to how on Earth this happened. Was it because of an Energy Bubble caused by Speculators? Was it because “Peak Oil” was proved wrong? Was it because of new oil discoveries which increased the oil supply? Was it because of the economic collapse? Three culprits have become glaringly obvious to me. First, the dollar strength.

This abrupt rise in the value of the dollar is mainly attributed to “de-leveraging.” Before July, many assets and commodities were perhaps over-leveraged. With the unwinding of the credit crisis these assets and commodities have experienced de-leveraging which has subsequently created massive demand for the US Dollar and increased its value. A big part of the leveraging and de-leveraging came from the rapid rise and fall in Hedge Funds. This has also affected the price of oil indirectly by making the dollar worth more. When the dollar is strong, its worth increases since oil is priced in Dollars worldwide. The massive de-leveraging is slowly coming to a halt, but it is tough to say whether or not the dollar will remain strong because relatively speaking most country’s economy’s and therefore currency’s seem even weaker than that of the U.S.


A second reason for the fall of prices is the fact that this is traditionally the time of year when prices descend. Oil prices are almost always higher in the summer, and lower in the winter. This is due to weather, the rise and fall of demand, and the summer driving season (with higher refining requirements).

Thirdly and perhaps most obvious, the current economic climate has lessened demand significantly. In fact the US went from using around 21 million barrels a day in 2006 to around 19 million barrels a day now. Interestingly enough however, world energy use is still scheduled to increase both this year and next. Increased demand from Asia and the OPEC countries is the main cause of this.

Welcome to our initial post!

Let’s get right down to business
The reason this blog was created, is to help inform the common land owner of the Oil Industry, its direction, its potential, and its noteworthy news. As much power and influence that the Oil industry has, one would think that transparency of data would run freely through the culture like a springbuck on steroids. One would be wrong. In fact simple lack of understanding has infected nearly part of our country from politicians to principals; and sadly, even trusted industry professionals and analysts are often as mislead as a North Korean missile. In my investigations and analysis, I hope to be able to interact with many of you and draw attention to the gravity of the situation at hand, as well as give direction as to people whose analysis can be trusted–and whose track record is impeccable.
Vocabulary and Pun disclaimer: For Reasons of my own sanity, I plan on making these postings humorous, if not ostentatious. Boring reading makes for boring people.
The Oil Industry Is In Crazy Times. At no time in history has the oil industry faced the problems, costs, shortages, influence, and importance as it does today. Oil has become the most important commodity there is to the luxuries of the modern world.

To understand the importance of oil, first we must learn all of oil’s uses. Oil, and Oil Products: gasoline, plastics, pesticides, balloons, candles, CD’s, contact lenses, crayons, detergents, dishwashing liquid, fishing lures, fishing nets, hearing aids, guitar strings, glues, paint, insulation, jet fuel, linoleum, lip balm, solvents, perfumes, refrigerators, dish washers, shoe polish, eye glasses, all types of balls, tennis racquets, pvc, shoes, saccharine, agro-chemicals, ammonia fertilizers, polyester, ink, dye, cosmetics, umbrellas, tires, toners, toothpaste, transparencies, upholstery, rubber, tar, asphalt, etc.MEDICINES: analgesics, antihistamines, antibiotics, antibacterials, sedatives, tranquilizers, pill coatings, aspirin, penicillin molds, suppositories, cough syrup, heart valves, rubbing alcohol, tubing, sheeting, splints, prostheses, blood bags, disposable syringes, catheters, sterilizers, cancer treatment dyes, films, creams, etc. Items Built Through Oil Manufacturing: air conditioners, boats, nearly all current forms of metallurgy, nearly all electronics production, bubble gum, bottles, all car production, all computer production, etc.

Gas Prices

The only industry as hot as the Oil Industry: the prosthetics industry.

Food: Oil also affects every aspect of food production. Currently, around 10 calories of fossil fuels are required to produce every 1 calorie of food eaten in the US. The average piece of food is transported 1,500 miles before it finds your plate if you live in the United States. In Canada it is 5,000 miles.

Obviously this list is very long, and this is its abreviated form. There were countless other items that didn’t make the list due to my need for brevity. Perhaps I shall make the list easier next time by listing all the products that are not made from oil. Then again, it would take a long long time to find such products.