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  • Writer's pictureOil Patch Press

"Wait a minute! My lease doesn't say that!"

Not too many mineral owners know what happens to their oil and gas lease after it disappears into the vaults of the company that took it (called the Lessee). It’s very important that all of the clauses in your lease that you, or your attorney, worked so hard to negotiate and get, truly get honored. Too often at least some of them are not carried out as intended by the mineral owner. Maybe, the company didn’t read the lease correctly. The lease analyst working for the Lessee often plays a bigger role in determining whether a hard-fought clause will be carried out correctly, or even overlooked, than Lessors realize. It’s the lease analyst who reads the lease and enters all its terms into the computer database.

Mineral owners need to understand what happens to their lease once they sign it and turn it over. This is true especially if the lease contains what we lease and title analysts call a lease jeopardy clause, meaning the lease will terminate if the actions required of the Lessee by the clause are not carried out correctly. The best example of a lease jeopardy clause is the “unless” rental clause. This clause requires a payment by the Lessee of a specific sum on exactly the date specified, in the manner specified. Unless the payment is made exactly in the manner required, the lease will automatically terminate. Today, companies shy away from delay rental clauses altogether, opting instead to pay the annual delay rental amount for each year of the lease up front, along with the bonus money.

Typically, the signed lease will go to the home office of the oil company, or wherever the Land Administration Department is located that will be responsible for maintaining that lease. After the lease is recorded into the county or parish records, the lease analyst is responsible for analyzing the lease and entering all pertinent data from it into the company’s land database. No exploration and production company exists today that does not have a land database system.

Every clause in the lease must be read carefully, understood, and gleaned for data that tells the oil company everything they need to know about this lease so it can be maintained successfully. Every oil and gas lease is an expensive asset to the Lessee, or each successive Lessee who buys all or part of that lease. So it is the job of the lease analyst to enter into the database every piece of data that then can appear in a myriad of reports and circulated to specific departments within the company, all for the purpose of maintaining the lease before, during, and after drilling.

But how does a lease analyst go about analyzing a clause in your lease, a special clause that you or your attorney worked so hard to get put into the lease? Let’s look at an example. This is a clause requiring a minimum amount of royalty to be paid under the lease. The words important to a lease analyst are bolded, to show the training that a lease analyst must have to correctly read and understand the clause:

Subsequent to completion of a producing well on the leased premises or on land pooled with the leased premises, should the royalties paid to Lessor during the first and any subsequent one (1) year period ending on any annual anniversary date of the completion of said well fail to equal a sum equal to ten dollars ($10.00) per net mineral acre (“minimum royalty”) owned by Lessor covered by this lease, Lessee shall pay to Lessor, within sixty (60) days following the end of said annual anniversary date, the difference between the minimum royalty and the royalties paid to Lessor during said anniversary period.”

The analyst will determine exactly what actions are required by the analyst’s employer, to comply with this clause. Each piece of important data needs to be entered into the land database using correct dates that apply only to this lease, and amounts of money that apply only to this lease. Adequate training and experience with the database is critical. While doing the analysis, the lease analyst must also carefully consider other factors.

First, the analyst must consider any company management policies that are affected by this clause. For this clause, the company’s management and legal counsel would decide the threshold amount for delivering minimum royalty payments, as a matter of company policy. This policy directly affects how the analyst enters the data into the database. For example, many companies will not write a check for less than $1.00. Others have a threshold of $10.00. This particular clause does not contain language causing it to expire if an amount less than $1.00, or less than $10.00, is not paid.

Next, the analyst must apply the company’s database entry procedures. The minimum royalty data in this clause would be entered into the database as a lease payment obligation coded as a “minimum royalty”, with a reoccurring obligation date equal to the day and month of the completion of the first well. An exact date is not known before the first well is drilled. The company’s data entry policies and procedures should outline in detail how the analyst will be alerted to enter a date as soon as a well is completed. Remember—the clause says to use the completion date, not the later date that the well begins producing and selling production!

Last, the analyst must consider who else inside the company needs to know about this minimum royalty obligation, and when they need to know it. To start, this minimum royalty obligation should appear in the monthly obligations report for the month of the anniversary date of the signing of the lease. That’s just a reminder, until the lease is drilled. Then, after the completion of the first well, the date is changed in the land database, to be the completion date. This obligation will then appear every year, and cause any minimum royalty due to be calculated and paid, until the lease expires under its own terms.

This is only one clause taken from the Oil Patch Press book, Principles of Oil and Gas Lease Analysis: Uncommon Clauses. There are hundreds of clauses found in this book and its companion volume,

Principles of Oil and Gas Lease Analysis: Common Clauses. Visit our paperback bookstore page to learn more.

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