Insights

Top 8 Questions You Might Have About Oil and Gas Leases

Leasing

We understand the importance of accurately securing mineral rights. A sound development plan, includes verified ownership of the leased minerals. Most companies decide to: (1) either acquire the minerals outright (owned in fee simple) and let other operators lease and pool their minerals into their development programs, or (2) lease the minerals from the various owners in the locations and formations of interest. In either strategy, correctly identifying the mineral owners is key to the development process.

Below we’ve compiled the most common questions about the oil and gas leasing process.

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1. How Does the Oil and Gas Leasing Process Work?

The oil and gas leasing process is a multi-step process that begins with determining your area of interest, then checking the public records to determine what portions of the area are leased or open. Once open acreage is determined, we conduct additional research to locate contact information for the open minerals.

We present an offer to the mineral owners to lease their minerals for a period of time at a specific price per acre. If the offer to lease is accepted, we send the mineral owner a lease form and order for payment.

Once a mineral owner executes a lease, we begin title research to confirm the amount of acreage owned, and formations owned by the mineral owner. Once this research is complete, we provide a payment to the lessor for the owned acres. Then we file a memorandum of lease in the county courthouse to ensure public notice of the lease. This record confirms that our client now has a valid lease.

2. How Long Does a Lease Last?

The primary term varies depending on the area, but a initial term of 2-5 years is considered standard. If no drilling has commenced within this initial term, some leases allow for an extension of the lease for another term, usually 2-5 more years. If no drilling has commenced within the term specified in the lease, the lease will expire. At this point, the mineral owner may negotiate a new lease or amendment of the existing lease to allow for subsequent terms. If a well has commenced and complies with the production and operations provisions of the lease, then the lease will be held in perpetuity. Portions of the lease not associated with a producing well may be released, depending on the provisions of the lease, and the statutory requirements in that jurisdiction.

3. Who is Involved in the Leasing Process?

At the onset of each project, we will work with you to establish price per acre acquisition costs, key contractual provisions, and preferred leasing forms. From there, our experienced lease researchers and buyers will do the rest. We negotiate directly with the mineral owners and handle all communications during this process. Once the minerals are verified and payment has been made, we will transfer all information to the client, where the client’s in house staff can take over from there (we also offer lease records management and other land department solutions if you do not have the bandwidth to handle the new incoming leases).

4. What Lease Form Should We Use?

There is a generic lease form known as a Producers-88, which has been used industry wide for many years, and has undergone several revisions over time. Many companies have their own lease forms. Which form is used will depend on client preference as well as local market expectations. If you want to lease quickly in a very competitive area, consider a lessor-friendly form - shorter, easier to read, and includes lessor-friendly provisions.

5. What Roadblocks May Occur?

A leasing program is not without roadblocks. Cinco has ample experience to navigate any of these common issues that typically arise:

  • Cloud on Title. While conducting ownership research before lease payment is made, our researcher determines that there are recorded documents in the public chain of title that make it unclear who owns the minerals. This can be time intensive to clear up, and sometimes it is cost prohibitive for the amount of minerals to be leased. Other times, this can be a simple fix, such as recording a corrective document to clear the cloud on title. Based on our experience, we will recommend the best course of action when dealing with a cloud on title.
  • Gap in the Chain of Title or Poor Accessibility to Instruments. Some courthouses are underfunded and have unorganized filing systems, making it challenging to locate the needed title instruments. Likewise, the chain of title may be missing documents (indexed incorrectly or there was a failure to record a key document). This can happen when a death occurs, and the decedent’s estate goes through probate. Oftentimes, the mechanism that transfers an asset to an heir (probate) is not recorded at the county level. This can usually be cleared up with additional research.
  • Disinterested or challenging landowners. Sometimes despite best efforts an owner will not agree to the terms of the lease or have no interest in leasing. A skilled negotiator can often work with the owner to figure out what they really need out of the transaction, and then pivot discussions toward meeting that need. Sometimes all it takes is getting to know someone.
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6. Which Geographic Locations Do You Service?

We serve the continental United States, as well as coastal offshore (GOM). We have offices throughout the United States, and experience in every major basin. Over the past 30 years, we have have conducted land work in 38 states. As a result, we have local resources in or near every productive region and can deploy teams to your area of interest for lease and mineral acquisition, title research, due diligence or right-of-way acquisition.

7. How Do We Determine Market Rate for Lease Bonuses?

Many companies use their internal model based on a geological assessment and various assumptions to establish their pricing parameters. In addition, Cinco can evaluate the going market rate by sending our agents to locations to scout for activity and data points, in conjunction with our proprietary resources. It’s essential to remember that prices are largely based on well economics, though area specific intersection over-value certain areas.

8. How Do I Ensure a Smooth Process with Cinco?

Before initiating a development program, establish your budget and strategy. Know your buying parameters, risk tolerance and time frame. Cinco uses its long-standing knowledge and repertoire of experience in the oil and gas leasing process to develop your strategy, help you create a competitive advantage and make recommendations to your leasing program along the way.If you’re ready to discuss a leasing program and desire transparency and great execution, contact us today

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