Oil and Gas Lease Language Things to Consider Before Signing a Lease The recent increase in well drilling within Geauga County has caught the attention of residents and local governments and raised concerns about the potential environmental impacts associated with well drilling and the implications of lease language agreements. Landowners regularly contact, and are contacted by, oil and gas well producers to drill wells on their property. A landowners’ best defense is to include all concerns pertaining to property, mineral rights, and resource protection in a lease agreement. Seeking Legal Counsel: Site assessment: All prospective landowners considering the Landowners should discuss any and all property damage that may occur to installation of an oil and gas well are essentially crops, fences, trees or other property assets and provide a resolution of leasing their mineral rights to a producer. A lease damages in the lease language, should any occur. In addition, landowners maps out the terms and conditions which solidify should know how much and which parts of their land will be used for the partnership between the landowner, or access, drilling, production, pipelines, compressors, and short or long term lessor, and the producer, or lessee. A lease is a storage or equipment. Finally, landowners should inquire about directional legal and binding document that, if executed drilling (defined bellow). wisely, will protect the property and landowner for the life of the well. Contacting an attorney Leases should include language requiring the leaseholder to comply with all experienced in oil and gas well lease local requirements or recommendations of the most recent version of the agreements will ensure that the language in the following: document will satisfactorily meet the needs of both the lessor and the lessee. • “Geauga County Water Management and Sediment Control Regulations” Landowners interested in having an oil and gas • Riparian and Wetland Setbacks as required by Subdivision Regulations well installed on their property will work closely or Local Zoning Requirements with a landman. A landman is the individual • Floodplain setbacks through local building codes responsible for purchasing leases on acreage • Noise Control through local Zoning Requirements that an oil company thinks may contain oil and gas. A landman may or may not be independent. An independent landman will assign an oil and It is strongly encouraged that a copy of the regulations listed above are gas well lease to another company. Landowners inserted into the lease agreement. should obtain references and background information on landmen and the companies they Definitions: represent before agreeing to terms and Cash Bonus – An up-front one time payment paid upon signing the lease or conditions in a lease. Lessors may also want to prior to commencement of drilling the well. consider the following before establishing the conditions of the lease: Primary Term – The number of years that a lease is in effect before drilling occurs. This is usually no more than two (2) years. • Can a higher rental payment be received Secondary Term – The length of a lease after a well is drilled, usually lasts while the well is actively drilled? as long as the well produces a commercial quantity. • When does the company intend to start drilling? Pooling or unification – A provision that allows the lessor’s land to be • Can the terms of the lease be renegotiated at combined with adjoining lands to form a drilling unit. any time? • What is the primary term for the lease? Delay Rental – Annual rental payments paid to the lessor after the first year of the primary term, usually on a per acre basis. Many leases contain a clause that allows the Royalty – The share of production from your property. In a lease, this is producing company to assign or sell your lease to referred as a fraction, usually 1/8 of the value of the oil and/or gas produced other firms. Be sure that the language and sold. established in the original lease will apply if the lease is reallocated to another company. Shut-in Royalty – Payment in lieu of a production royalty. Paid when a well is “shut-in” (capable of production, but no producing), for maintenance or other reasons. Termination – Occurs when the primary term expires or when economic production ceases during the secondary term. Free Gas – An annual allocation of gas to the lessor for domestic heating purposes. This is commonly 200,000 cubic feet or more per year and goes to the person upon whose land the well is located. Directional Drilling – Drilling that is not directly vertical. The drilling direction changes to horizontal drilling to better locate the oil and/or gas product. Oil and Gas Lease Language Things to Consider Before Signing a Lease (Cont’d) Productivity: Restoration: References: A “free gas” provision may be The lease should also include language included in the lease language. specifying standards for site reclamation after Free gas is an annual allocation of the well has been installed and plugged. gas to the lessor for domestic purposes. Should gas usage The lessor should reserve the right to exceed the amount of gas stated in purchase the well at the time the lessee the lease, the lessor should be desires to abandon it, including a clear able to purchase additional gas at methodology for determining residual value the current well head price. written in the lease. ODNR-Division of Mineral Resources The lessor must also consider what The lessee should and can be required to Management will happen to the well once it is no restore the property disturbed by drilling 2045 Morse Road-Building H-3 longer economically viable for an operations as close to its original condition as Columbus, Ohio 43229-6693 oil and gas well company. Often practical. 614-265-6633 times the well can still supply the www.dnr.state.oh.us/mineral/oil/ needs of domestic uses. If this is Before signing a lease, any landowner index.html the case, the landowner/lessor considering the installation of an oil and gas may consider assuming ownership well should seek legal council. Ohio Oil and Gas Association of his/her well. Once ownership is (OOGA) assumed by the landowner, 1718 Columbus Road SW (St. Rt. 16) plugging the well is now the P.O. Box 535 landowner’s responsibility if and Granville, Ohio 43023 when the well no longer produces. 740-587-0444 www.ooga.org Near the end of a well’s life, gas New York State Landowner’s Guide companies may operate the well to Oil and Gas Leasing only one day per year to meet www.dec.state.ny.us/website/dmn/ ODNR requirements for active brochure.pdf wells so that they do not have to cap the well and reclaim the site. Drilling for Oil and Gas in Northeast Lessors should specify in their Ohio—A Landowner’s Guide and Due lease agreement that the lessee Diligence Checklist provide an annual financial Christopher Eiben statement indicating production Information for this publication taken in part and net operating expenses. In from A Landowner’s Guide to Oil and Gas Oil and Gas at Your Door? addition, the lease should stipulate Leasing published by NY State DEC, A Landowner’s Guide to Oil and Gas that the document becomes null Landowners and Leasing for Oil and Gas in Development 2nd Edition and void if the well is not Ohio published by ODNR-DMRM, Drilling Chapter III-Tips for Landowners economically productive in any two for Oil and Gas in Northeast Ohio published Oil and Gas Accountability Project (2) consecutive years. If a lease is by The Research Group, Inc., Chap. III Tips voided, ODNR can order the driller for Landowners, Oil and Gas at Your Door?, Negotiating Oil and Gas Leases on to plug the well and reclaim the published by Oil and Gas Accountability Indiana Farmland site. Project. Gerald A. Harrison The landowner’s/ lessor should Prepared by: reserve the right to examine all Geauga Soil and Water Conservation District production records, charts, meter 14269 Claridon–Troy Rd. readings, gas sales contracts, or P.O. Box 410 any other data connected with the Burton, OH 44021 well’s production and revenues. Phone: 440-834-1122 Fax: 440-834-0316 Email: email@example.com Geauga SWCD Mission: “To conserve, protect, and enhance the resources of Geauga County by providing leadership, education, and assistance to all.” All services are provided without regard to race, religion, gender, age, physical or mental handicap, national origin, or politics.