Negotiating Your Lease

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.

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.