Mineral owners share many similarities with anglers—both the hobbyists and the avid sportsmen. Success depends on attracting another party to engage, baiting the hook and then engaging in a period of negotiation before declaring a victor.
Luckily for owners, a great lease enables multiple victors. Yes, it’s possible to structure a lease agreement that leaves both the operator and owner profitable and happy. We have the benefit of experience when it comes to lease negotiations, so we’re sharing a few critical lessons with you.
ALL THAT GLITTERS IS NOT GOLD.
Mineral owners understand money: how to earn it, how spend it and how to analyze it. That’s why one of the biggest mistakes we see owners make is focusing the negotiations on the decimal interest and lease bonus. Operators know exactly what type of glitz will catch your eye, and that’s what they’ll put at the end of their line. While you chase the shiny lease bonus bump, they’re hoping you’ll overlook that lease clause bequeathing additional assets (like free water) to them. They’re baiting you with a few thousand in the hopes you’ll be too distracted to notice you’re inadvertently signing away tens (or hundreds) of thousands in revenue.
Just like the best fishing spots are around the edges of the lake in brush cluttered areas, the highest value lease clauses are often obscured from view. Experience teaches professionals to look beyond the surface and net the prize catch.
LEASES LEANS TOWARDS THE OPERATOR.
The first lease that is set in front of an owner isn’t middle ground—it’s entirely the operator’s ground. Almost anything not explicitly stated in the lease defaults in the operator’s favor. Many owners are dismayed when they discover rights they presumed they retained, were signed away in the lease under the guise of “reasonable accommodation”. For example, many owners are told (verbally) that their land’s surface features will be respected and cared for during production. It isn’t until damage is incurred that they discover the operator isn’t liable to fix the issue or provide additional compensation.
Razing the hardwood timber? Necessary for security purposes.
Placing the road twenty feet from the house? Cheapest access option.
Moving your cattle fencing? Opening and shutting a gate isn’t efficient for the trucks.
It’s important to remember that while you like (and trust) the company’s representative, they’re in a sales role. Their job is to get you to sign the lease. When conflict arises, they won’t be there, but your lease will, and you’ll be thankful for its specificity. When you see an infraction about to occur on your land, you can simply show the foreman the lease clause. No phone tag to reach the right person. No suit to cover damages. No arguing. Simple.
While some issues like noisy trucks and unsightly land ruts are annoying, other items can be dangerous. Do you really want to allow contaminated, by-product water to be dumped down an old well shaft? It’s critical to explicitly state what right you are (and are not) granting the operator.
MINERALS AREN’T THE ONLY MARKETABLE RESOURCE.
If you have water, you have a very valuable resource. Much of oil and gas production occurs in dry, arid regions, so if you have water, put in a meter and charge by the barrel. It will substantially increase your check and the operator will save on transporting water onto your property. Don’t let a lease bonus or higher decimal interest trick you into surrendering your water’s value.
Timing is everything.
In our article, Which 2019 Industry Highlights Will Shape Mineral Owners’ 2020 Strategies, we highlighted the vast quantity of paused wells in the Anadarko Basin. Approximately 750 wells could be producing, but are standing and waiting for better prices. This is where the financial world’s “Time Value Money” equation comes into play. The operators are typing up the owners’ assets, and they deserve compensation.
Unfortunately, there are many owners in Oklahoma likely learning this lesson the hard way. The difference is minute. Avoid a lease with the wording “…for so long as operations continue” and restructure it to “…for so long as production continues,” and add a minimum annual payment amount. When the operator pauses the well to wait for stronger market prices, you’re compensated for the opportunity. Time is money.
LEAN ON EXPERTISE.
If you wade into lease negotiations alone, you aren’t a metaphorical David v Goliath, because that match still had one-to-one parity. The representative at your door is backed by an army of attorneys.
DOES HIRING A QUALIFIED ADVISOR REALLY MAKE THAT MUCH DIFFERENCE?
Yes. A qualified advisor knows market rates for lease bonuses, which protects you from leaving money on the table. Additionally, your advisor should be building in long-term considerations so that your lease deal is more profitable for years to come. Browse through any mineral owner’s forum and you’ll hear tales of bad actors taking advantage of owners. An advisor can help you attract ethical operators and wrap your assets in protective clauses.
Negotiating an oil and gas lease is about precision, finesse, and not all qualifications are created equally. In our article, Finding Your Fit: Mineral Owners Guide To Evaluating Advisors, we break down each type of advisor.
A CPL requires 10 years of relevant, successful experience on top of education and exam requirements. It’s that practical experience that makes a CPL a great choice.
THE EARLY BIRD GETS THE WORM.
The US is blessed with mineral resources, and many owners want to attract an operator. You don’t have to wait for the landman to knock. Do a little research on who’s drilling in your area and what existing infrastructure is nearby. The Barrow Ranch has nearly a century of production success, easy access to the new pipeline and large resource pools, and with all this, they still had to proactively create their next opportunity. It’s an exceptional story and models the type of collaborative partnership that can be achieved between owners and operators.
Our legacy is simple. We safeguard yours. Learn what makes Guardian Mineral Management different by exploring our Client Commitments, and set up a time to introduce yourself. Scheduling your complimentary meeting is simple, click the button and let us know how we can reach you.