What is a fair lease offer… in the Bakken? in the Barnett? in the Fayetteville? in the Marcellus? in my region?
This most-often-asked question is a good one. It is also impossible to answer with exact values because what is good for one person, parcel of land, period of time and area, may not be good for another. The best answer: a fair lease offer is one that you feel good about.
As you probably already know, lease rates have been a moving target over the past year due to the unprecedented oil price highs, and now the economic downturn. With oil and gas prices so low, companies are going for one of two things at this time: either as-near-to-sure-things-as-possible or very low cost wildcat, higher risk areas. This means that they are still obtaining leases and they will still pay relatively well for a low-risk area, or alternatively, they want to pay a very low amount for a high risk area. You need to know where your property fits on this spectrum… sure thing to wildcat… because that will help you know whether to expect a high or low bonus payment and royalty. By the way, there are many aspects to determining where your property fits on this spectrum: whether or not there is oil and/or gas, how much of it there is, and how easy it is to get it out of the ground.
So, you have an offer in hand. Now what?
First, you need to determine what your personal negotiation points are: do you need the bonus money now (e.g., for a down-payment, remodel, new car, etc.) or would it be money sitting in the bank? If the latter, then you are more flexible on that item. The long-term payoff is with a high royalty IF they drill and IF there’s oil or gas and IF oil and gas rates are high enough to make the company and you good money. If you are more interested in the longer-term, then this would be something to try to get as high as possible. And then there’s the lease term, or length of the lease. Generally, it’s best to have this as short as possible while ensuring that your other interests are covered. You could start at 24 months, for example, but knowing that you want a higher royalty, you might tell them you’d be willing to go for a 36-, or even 60-month length of lease if they up the royalty. For example, you could go from 1/8th to 3/16ths or from 3/16ths to 1/5. You can also get a clause in your lease that they will drill the 1st well within 48 months or the lease is null and void after that term. Know that everything is negotiable but there are some restrictions that the oil/gas companies have that may limit their timetables. For example, it takes time to get title work done, to obtain leases on adjacent properties necessary for drilling spacing requirements, and also for the permit process. Thus, a 48-month drilling requirement clause may be impossible in some situations. What is required of you: know what you want/need and also learn what the other party wants/needs.
Second, you need to gather as much information as you can to determine where your property fits on the spectrum of wildcat to sure-thing. Some production information is available on the web. It’s also available in the County Recorder’s office where your Mineral Rights property is located. Also, you can Google, Oil and Gas resources and the county name to see what the United States Geological Survey (USGS) has determined to be the potential for oil and gas recovery in your area. There are some additional sites that can be very helpful, which I will try to post on this blog over the next few weeks.
Third, collect information on lease rates in your area. In general, this can be helpful but is ancillary to your negotiation, so don’t worry about it if you come up empty handed. The best place to start is talking honestly and openly with the Mineral Rights owners of adjacent properties. Tell them what offers you are considering and ask what they have seen or heard (some people are very close to the vest and the best reason for this that I can figure is because they don’t want to appear stupid, so be sensitive to that). Some areas have local newspapers or website blogs that publish lease rates and/or production information. You might also call the County Recorder’s office where your land is located, though I have generally found them to be not very helpful.
For help on the negotiation process, I suggest this wonderful book: “Getting to Yes: Negotiating Agreement Without Giving In” by Bruce M. Patton, William L. Ury and Roger Fisher.