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Understanding oil and gas leases is important PDF Print E-mail
Written by Jenna (Heermann) Keller   

This past July, most Phillips County residents could be found harvesting wheat, catching up on field work or at the county fair. While local farmers were busy working this past July, the local gas industry was also busy in Phillips County.

July brought another wave of oil and gas lease offers in Phillips County with Fort Worth, Texas-based Omimex Petroleum offering leases to many mineral rights owners east of Holyoke. Black Raven Energy, Inc. has also been working to expand operations in Phillips County. Having secured several oil and gas leases earlier this year, Black Raven Energy, Inc. submitted 17 new well permit applications south of Amherst in the month of July.

While oil and gas leasing is not new to Phillips County, the actual drilling of multiple wells and gas production is. Over the past several decades, farmers have routinely accepted bonus payments from oil and gas companies for signing oil and gas leases, but rarely have these companies been heard from or seen again. The leases simply expired with no activity or disturbance to the fields. A few years later the pattern would repeat itself.

Today, things have changed in Phillips County. Within a few short months of signing an oil and gas lease, the gas company may actually begin the steps to drill a well on your property, and before long you may be navigating the tractor around a well pad in the middle of your field if you haven’t taken the steps to negotiate a more favorable oil and gas lease.

Most mineral owners will be presented with what is commonly known as a producer 88 oil and gas lease. While this lease may be standard for the gas industry, this lease should not be your standard as a farmer or the standard for gas leasing in Phillips County.

These leases allow liberal use of the property for the development of natural resources. Rarely, if ever, is signing a standard producer 88 the advisable course of action for a landowner.

Before signing an oil and gas lease, you need to evaluate the impact of gas developments on your farming operations. There are two main financial incentives in signing a lease: the bonus payment for signing the lease and royalties if gas is produced.

Bonus payments are typically expressed up front, making the evaluation easier; however, the certainty of royalty payments is really unknown at lease signing. Royalty payments in Phillips County are known to yield as little as a few hundred dollars a year, but at the same time the prospect of new wells and production creates optimism about increased payments in Phillips County.

Generally, you should evaluate the financial incentive of signing the oil and gas lease primarily from the bonus payment being offered with cautious optimism about the prospect of payments from royalties.

The financial incentives of signing an oil and gas lease must be offset by the financial downsides to leasing. The adverse financial impacts may include lost acreage for production due to well pads, roads and similar structures; disruption or change to the efficiency of your operations to the presence of the gas operations; and decreased property values.

While surface damages for lost acreage are appropriate, your bargaining power to arrive at a price will be effected by the terms of the oil and gas lease. If you sign a lease that is favorable to the gas company, the amount you ultimately receive for surface damages may not be reflective of the actual impact to your operations.

Before deciding on whether to lease your minerals, evaluate how the oil and gas lease may affect your operations and whether the money for signing the lease accurately reflects the impact to your operations.

A large amount of farmland in Phillips County is not owned and farmed by the same person. An oil and gas company will likely approach the landlord about signing an oil and gas lease. With the allure of the bonus payment, the landlord, who may be unlikely to realize the impact to the farming operations, might even sign an oil and gas lease without consulting the tenant farmer.

Similarly, a mineral owner who does not own any surface interest in the property might also sign an oil and gas lease without the farmer or the surface owner even knowing about the lease. As a tenant farmer or surface owner who does not own all of the minerals, you should contact your landlord or the mineral owner under your property to inquire of their intentions in signing an oil and gas lease.

Ask the landlord or mineral owner to consult you before they sign an oil and gas lease, citing your concerns about the impact to the farming operations or your property. You might even offer to pay for their costs in negotiating the lease to ensure that your farming operations are protected.

If you, your landlord or the mineral owner underlying the property you farm recently received an oil and gas lease, take the time to analyze both the financial benefits and downsides to your operations. From there, negotiate the terms of the lease to make the lease a win-win for both you and the gas operator.

This article should not be substituted for legal advice, and you are encouraged to contact an oil and gas attorney for legal advice concerning the information provided in this article.

Jenna (Heermann) Keller is an associate attorney at Dufford, Waldeck, Milburn and Krohn, LLP and a Haxtun native. She is the daughter of Lauren and Jody Heermann of Haxtun.

Holyoke Enterprise Aug. 4, 2011