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Oil, Gas, and Mineral Leases

Oil, Gas, and Mineral Lease Agreement Basics

Michigan Farm Bureau recommends that farmers and landowners proceed with caution before entering into a contract for oil, gas or mineral rights. The best advice is to consult an attorney before signing any agreement, but to help you through the process, we've compiled some basic pointers to consider.

What is an Oil, Gas or Mineral Lease?

An oil, gas or mineral lease is an important legal document that defines the relationship between the lessor, the landowner (or the owner of the mineral rights), and the lessee, the party interested in producing/extracting the oil, gas or other minerals. This lease is like any other lease except that it contains provisions related to the assignment of rights in the substance of the ground beneath the landowner's property: that is, the oil, gas and minerals.

Many of the provisions may be unfamiliar to the common landowner and are usually note in the landowner's best interest because they may allow a lessee to mine or drill for resources without requiring a fair royalty payment to the landowner. Landowners should seek legal assistance from someone with oil and gas leasing experience prior to signing a lease.

A landowner does not have to sign a lease just because the landowner is approached. Virtually any lease provision offered is negotiable.

Who Owns The Rights to Minerals on My Land?

As the landowner, you own both your land and the minerals beneath your land. Therefore you have the right to negotiate an acceptable lease or to refuse an offer, unless the mineral rights were severed from the surface rights by a previous owner and were never purchased by you.

Oil drill in a field

Issues to Look For in an Oil, Gas or Mineral Lease

What exactly is the subject of the lease? Oil, gas, other minerals? Which other minerals?
What lands are being leased? Does the lease include underground storage rights?
How much is the royalty interest? Are there different rates for different minerals? Is there any override royalty or production payment?
How exactly are royalties to be calculated? May the Lessee deduct any costs? If so, what costs? When are royalties to be paid? Is the lessor responsible for any portion of any tax or assessment levied on resulting oil, gas or mineral production?
What records regarding production and royalty calculations will be made available to the lessor? How and where will the records be made available?
Is seismic exploration permitted? How will any damages caused by seismic exploration be handled?
Are roadways, pipelines, storage tanks and the like allowed? How much of the surface area may be used? Where, exactly? May these facilities be used in connection with oil/gas/minerals removed from other lands?
What is the primary term? Are there annual rental payments? When are such payments to be paid?
What constitutes "commencement" of drilling? What effect does a dry hole have on the lease? Is there a royalty payment required for a shut in well?
What damages to the surface is the Lessee responsible for? To what condition must the site be restored?
May the Lessee use water or other materials from the site? Is there a charge for such use?
May Lessee inject brine or anything else into wells drilled pursuant to the lease? If so, what? May materials from other sites be injected into wells on the lease site? Is there a fee for such use?
Are there pooling, unitization or allocation provisions in the lease?
May the lease be assigned?

Additional Resources

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