oil and gas lease

oil and gas lease

An arrangement granting the right to explore for and extract oil and gas and possibly related minerals. Some important concepts are

• Oil and gas are considered minerals, but the law pertaining to them is different from solid minerals because oil and gas are said to be “fugitive” and capable of traveling from place to place to the lands of different owners.

• Because of the fugitive nature of gas and oil, it is possible for one person to drill many wells on his or her property and effectively drain the gas and oil from all surrounding lands. As a result, many states have laws enforcing pooling of interests or unitization if the property owners cannot agree on a fair way to cooperate in production. Such laws have been held constitutional.

• Because oil and gas are considered such important natural resources, most states with significant deposits heavily regulate exploration, drilling, production, and the rights of various parties to contractual arrangements. (Such legislation must be read into contracts between the parties.)

• Leases fall into two broad categories: “or” leases and “unless” leases. “Or” leases obligate the lessee to drill or to pay “delay rentals,” but if the lessee does neither, there is not an automatic termination of the lease. By contrast, the “unless” lease says that if the lessee does not drill by a certain time, the lease will terminate unless the lessee pays delay rentals. Nonpayment and nonproduction will result in forfeiture.

• Rent under the lease is generally paid in the form of royalty payments; lessors generally reserve a one-eighth royalty interest.

• Alease on a pooled tract of land may provide for offset royalties, meaning that if no well is drilled on the subject land, but one is drilled within a certain distance of the land, then the lessor will still be entitled to royalty payments based on the production of the other well.