Oil & Gas Lease
The oil and gas lease is a legally binding contract between the mineral owner (Lessor) and an individual or company (Lessee), which allows for the exploration and extraction of the minerals covered under the lease. The lease determines the rights and duties of each party with respect to exploration, drilling, and the removal of oil or gas, among others.
1)
Granting Clause
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The granting clause is the part of the lease where you, as the mineral owner, grant to the oil and gas company the specific right to come onto your land and explore for oil and gas.
This Lease Agreement (the “Lease”) is made and entered into this _____ day of __________, (the “Effective Date”) between ____________________ as Lessor, and ____________________ as Lessee. In consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt of which is acknowledged, and of the covenants and agreements contained in this Lease, on the part of Lessee paid, kept, and performed, grants, demised, leases, and lets to the Lessee, for the sole and only purpose of exploring by geophysical and other methods, mining and operating for oil (including but not limited to distillate and condensate), gas (including casinghead gas, coal bed gas, coal seam gas, helium and all other constituents), and for laying pipelines and building tanks, powers, stations, and structures, to produce, save, and take care of those products, all that certain tract of land, together with any reversionary rights in it, situated in __________ County, Arkansas, and described as follows: [Legal Description of Property] and containing _____ acres, more or less, together with, and to the same extent as if specifically described, all lands owned or claimed by Lessor which are adjacent, contiguous to, or from a part of the lands particularly described above, including all oil, gas, and their constituents underlying lakes, rivers, streams, roads, easements, and rights-of-way which traverse or adjoin any of these lands. All of the lands that are subject of this Lease are referred to as the “lands” or the “lease premises.”
3)
Royalty Clause
The royalty clause is the income portion of the lease paid when the lessee extends the lease into the secondary term. Most often the royalty will range from a 1/8th interest to a 1/4th interest, but it is also important what underlying basis your share is calculated from. The lessor’s share in production can be based on several different forms of the lessee’s realization of income. One of the most widely litigated issues of the oil and gas industry over the past three decades is the meaning of “market value” in lease royalty clauses.
The granting clause addresses at least three factors that determine the rights granted: > The rights given to use the land; > The substances covered under the lease; and > What land and what interests are subject to the lease.
In today’s market, an up-front cash bonus per acre is paid by the oil and gas company for the right to come onto your land and explore for oil and gas. Most recent cash bonuses have ranged from $150 to $300 per acre, depending on a myriad of factors.
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This Lease shall remain in force for a term of five (5) years from the date above (the “Primary Term”) and as long thereafter as oil or gas, or either of them, is produced in paying quantities from the lands or from lands pooled therewith.
4)
Pooling Clause
Because a common resevoir of oil or gas is usually contiguous beneath multiple landowners’ properties, land is often “pooled” so that extraction can occur
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more efficiently. The pooling clause of the oil and gas lease generally provides that active production anywhere in the pool satisfies the habendum clause as to the leased premises as a whole.
2)
Habendum Clause
As to royalty, Lessee covenants and agrees to deliver to the credit of Lessor the equal _____% part (the “Royalty Fraction”) of the market value for the gas sold, used off the lease premises, or used in the manufacture of products from the gas, the payments to be made monthly.
The habendum clause defines the “primary” and “secondary” terms of the lease. The “primary” term is the period in which the lessee has the right to come onto the land and explore for oil and gas. The “secondary” term provides that the lease will remain in effect if a successful well is drilled during the primary term of the lease and production has occurred. Thereafter, the lease is maintained by “production” or “production in paying quantities” as outlined in the habendum clause. Ark. Code Ann. § 15-73-201. Production Extension. The term of an oil and gas or oil or gas lease extended by production in quantities in lands in one section or pooling unit in which there is production shall not be extended in lands in sections or pooling units under the lease where there has been no production or exploration. This section shall not apply when drilling operation have commenced on any part of lands in sections or pooling units under the lease within one year after the expiration of the primary term, or within one year after the completion of a well on any part of lands in sections or pooling units under the lease. The provisions of this section shall apply to all oil and gas or oil or gas leases entered into on and after July 4, 1983. Lessee is granted the right at any time and from time to time to pool or unitize the Lease and lands or any portion or portions of the Lease and lands. In the event a portion of the land hereby leased is pooled or unitized with other lands so as to form a pooled unit or units, operations on or production from such unit or units will maintain this Lease in force.
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5)
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Pugh Clause
In 1983, the Arkansas legislature specifically narrowed the impact of the pooling clause by adopting a version of the Pugh clause by statute. The Pugh clause expressly severs the leased premises horizontally between pooled and nonproducing or unexplored lands.
DEFINITIONS Casinghead Gas means any gas or vapor, or both gas and vapor, indigenous to an oil stratum and produced from such stratum with oil. Combination Well means a well productive of both oil and gas in commercial quantities from the same common source of supply, which has sufficient natural gas pressure to cause the gas to enter a pipe line carrying more than atmospheric pressure. Common Source of Supply means (1) the geographical area or horizon definitely separated from any other such area or horizon and which contains, or from competent evidence appears to contain, a common accumulation of oil or gas or both; or (2) any oil or gas field or part thereof which comprises and includes any area which is under laid, or which from geological or other scientific data or experiments or from drilling operations or other evidence appears to be under laid by a common pool or accumulation of oil or gas, or both oil and gas. Conservation means conserving, preserving, guarding, or protecting the oil and gas resources of the state by obtaining the maximum efficiency with minimum waste in the production, transportation, processing, refining, treating, and marketing of the non-renewable oil and gas resources of the state. Controlled Oil Field means any common source of supply of crude oil discovered after January 1, 1937, or any field discovered prior to January 1, 1937, provided any pool therein has been discovered after January 1, 1937. Controlled Gas Field means any common source of supply of natural gas discovered after January 1, 1937, or any field discovered prior to January 1, 1937, provided any pool therein has been discovered after January 1, 1937. Controlled Production means the production of oil or gas, or both oil and gas, from a controlled oil or gas field. Cubic Foot of Gas means the volume of gas contained in one cubic foot of space at the standard pressure base and the standard temperature base. The standard pressure base is 14.65 pounds per square inch absolute and the standard temperature base is 60° Fahrenheit. Field means the general area which is underlaid, or appears to be underlaid, by at least one pool; “field” includes the underground reservoir or reservoirs containing crude petroleum oil or natural gas, or both. The words “field” and “pool” mean the same thing when only one underground reservoir is involved; however, “field” unlike “pool,” may relate to two or more pools. Flowing Well means a well from which oil or gas flows naturally without pumping or other means of artificial lift. Gas means the natural gas obtained from gas or combination wells regardless of its chemical analysis. Gas Well means (1) a well which produces natural gas only; (2) any well capable of producing gas in commercial quantities and also producing oil from the same common source of supply but not in commercial quantities; (3) any well classed as a gas well by the Arkansas Oil and Gas Commission for any reason; or (4) a well that contains no liquid hydrocarbons in the reservoir. Oil means crude oil or petroleum. Oil Well means any well capable of producing oil in paying quantities not a gas well. Pool means an underground reservoir containing a common accumulation of crude petroleum oil or natural gas, or both. Each zone of a general structure, which is completely separated from any other zone in the structure, is covered by the term “Pool” as used herein. Production Interest means the right to a specified part of production.
O U R AT T O R N E Y S
MARK MURPHEY HENRY is MICHAEL SEAN BRISTER NATHAN PRICE CHANEY is a registered patent attorney. Nathan obtained his J.D. from Washington & Lee University and has a B.S. in Computer Systems Engineering. He is licensed to practice in Arkansas and the Federal Circuit Court of Appeals. KALEB KYLE HENNIGH STEPHEN CHARLES PARKER, JR. obtained his J.D. from the University of Arkansas and has a B.S. in Chemical Engineering. He is licensed to practice in Arkansas.
a registered patent attorney who holds a Master of Laws in Agricultural Law. Mark obtained his J.D. with honors from the University of Arkansas and has a B.A. in Biology. He is licensed to practice in Arkansas, Missouri, Oklahoma, the Supreme Court of the United States, the Eighth Circuit, and the Federal Circuit Court of Appeals.
holds a Master of Laws in Agricultural Law. Sean obtained his J.D. from the University of Arkansas and has a B.S. in Agronomy. He is licensed to practice in Arkansas.
holds a Master of Laws in Agricultural Law. Kaleb obtained his J.D. from the University of Oklahoma and has a B.S. in Agricultural Science and Natural Resources. He is licensed to practice in Oklahoma.
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DISCLAIMER This brochure is intended for informational purposes only, and to provide a general guide to understanding some of the many complex issues involving the legal rights of surface and mineral owners in Arkansas. This brochure should not be substituted for the counsel of an attorney in seeking advice concerning your specific rights as a surface or mineral owner relative to oil and gas leasing or development on your property.