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Oil & Gas Lease Negotiations: What is Different with Today’s Leasing Environment

By December 12, 2019Oil and Gas

Emens Wolper Jacobs & Jasin Law Firm
By: Heidi R. Kemp

Time changes all things. This statement is also true when it comes to the oil and gas industry. A topic that has come up a lot lately revolves around oil and gas lease negotiations. Many people who have had an oil and gas lease obtained that lease back in 2012 or 2013 when leasing was really prevalent. Some of those same people now have unleased acreage because their lease expired. Some people have never been leased. So what’s different now?

The leasing environment today is very different than it was back in 2012 and 2013. At the peak of the initial oil and gas lease negotiations, leasing was very much like a land-grab. Companies were trying to get as much property under their own leases as possible. It was like a mad dash with lots of competition – companies were vying for the same properties. This type of environment gave landowners a lot of bargaining power. Companies were more willing to negotiate better monetary terms and additional landowner-friendly language.

Additionally, landowner groups were able to come together and increase their bargaining position. Oil and gas companies could negotiate with a select number of people and end up leasing the whole (or a large portion) of the group. With negotiation, it was possible for landowners to get large up front bonuses and gross royalties, meaning no post-production costs can be deducted from the royalties. And, it was not difficult to get a twenty percent (20%) royalty.

When the dust settled and the oil and gas companies started planning development, often one company would be put together a unit that included landowners who had leases with different companies. This did not really deter development. The companies usually worked this out amongst themselves by buying or trading leases or even entering into joint venture agreements.

The reality is that all these years later, things are very different. Oil and gas companies have more strategically staked out their “areas.” The companies have certain geographical areas now where they focus on production and development. This strategy has negatively impacted many landowners’ bargaining power.

It’s possible that a landowner was able to get a great lease back in 2012 or 2013 but the company never developed the property so the lease expired. Several things are happening. Often, the company who originally took that lease is not currently developing property in that area so it is not interested in renewing the lease (if the lease allows for an extension) or in leasing it again.

Because of the relatively defined geographical areas, a company who is interested in leasing the unleased property does not generally need to worry that a different company will come in and lease it out from under them. This has basically eliminated most competition; and, without competition, the companies are able to offer lower monetary incentives and worse leasing terms.

This also means that if a landowner has unleased acreage and no company has approached them, then likely, no one is currently interested in leasing. It doesn’t mean that a company doesn’t have the property on its radar – it just means that the company doesn’t need it right now. Oil and gas companies will approach a landowner once that property moves up on its priority list. The initial offer is usually one a landowner should not accept. Our experience is that if the landowner attempts real negotiations, the leasing process might stall if the property is not a higher priority property. Waiting may be acceptable to the landowner if he or she does not want to get caught in a sub-par lease.

The flip side seems also to be true. Once the property becomes higher priority, the company will generally engage in true negotiations and landowners are still able to get decent monetary incentives and protective language. So, a landowner can gauge the company’s interest often by how it responds to the initial negotiations. However, there are certainly risks with waiting and holding out in hopes of a better lease. Thus, it is always up to the specific landowner to make a business decision regarding his or her own property.

And, always seek the assistance of knowledgeable oil and gas attorneys if approached with an oil and gas lease!