Is it necessary to give an option to extend a mineral lease? Would refusing to give an option to extend the lease kill negotiations? What dollar amount is standard on lease renewals? A friend was offered two-thirds of the orginal price offered per acre.
No, it is not necessary. Many leases contain no extension clause. There is no "standard" amount for lease renewals although I see quite a few with the two-thirds you mention. The rationale is that the lessee paid x$ bonus for the three year initial lease term and will pay two thirds x for a two year extension. It's a question of how long you are willing to wait for royalty income balanced against how much up-front bonus cash you are offered. There is no right or wrong, just what you are comfortable in accepting. For those nearing retirement age there may be benefits either way depending on specific circumstances. It's a good idea to speak with a tax professional.
Skip, thanks so much (again) In one of the discussions you mentioned that surface rights would be a separate lease - would this lease be made at the same time as the mineral lease and would the same terms as you mentioned above apply in regards to extending the surface rights lease?
No Shaleee, I did not mention that "surface rights were a separate lease". I said that a "no surface use clause" should be included in an O&G lease. And yes, all the terms of a lease remain in force for any extension period.
IMO never give option to extend lease in the original lease because you are basically giving them a 5 year lease. If they do not drill in the 1st 3 years who knows what the market will be at time the lease expires. If they like the area they will release but you will have maybe others that will enter bid and have option to maybe improve the terms of the lease with knowledge of what to include in the lease and have better terms, etc what if you had a lease that option date was back in spring of 2008 and the avg. lease in 2005 was < $200/acre you would have received renewal extention check for 2 years of $150/acre and missed the big money up to $15000/ acre during that brief time from april to sept 2008. If at the end of the 3 years and market is not good in your area they simply will let the option expire and you receive no extra bonus. Why give them a free look?
in sabine parish all the leases that were made by audobon (shell,Encana) in 06,07 are being offered $1500.00 for a two year extension with no change in the lease terms while chesapeak, petrohawk, comstock and others are paying $6000.00 a few miles away. Some of the larger land owners have refused to take this and are being drilled now. Once the well is drilled thats it no more leasing no more bonus money. You have to look at the operator. i read the other day that shell had drilled 26 wells with only one producing. the terms in the original leases are so much in favor of the oil co. they can drill the well pay shut in royalty for years at $25.00 per acre. If the property is in an area where there is alot of drilling near by chances are if a person does not take the extension money they will get drilled. If the area is not close to any activity a person could hold out for another offer.
parker---if you do not give operator option in original lease that is what you have if 3 years go by and your lease expires its becomes your option. If operator does not drill in the 3 year peroid and still like play they will come to you before lease expires with offer to "top lease" ie new 3 year lease with new bonus and your chance to add clauses,etc. so no other operator will bid for your lease; however other operator may contact you close to time of few months before expiration and pay you option to top lease before expiration with 10% bonus up front then remaining at signing if original operator does not spud well before expiration date to hold lease. This is what happen on some minerals I had in east texas. If they don"t like play at 3 years they will let expire with or without option they simply will not pay extention bonus and lease expires
Agreed, it's never in the best interest of the mineral/land owner to have that 2 year extension included in the intitial lease as it's just basically a pass for the O&G company to hedge THEIR opition to extend the lease period.
If, at the time where the primary term (generally 3 years, but can be 2 or even 1 in some instances). the prospects for any given area are further proven and the market has improved then the mineral/land owner would certainly be better off negotiating a new lease under the market terms at that time.
If the area is not as attractive to the O&G company, and/or market terms have deteriorated, then the company would simply elect to not excercise the option to extend the lease in the first place so the mineral/land owner would not see any of that "extra" bonus money anyways.
That said, the basic set up is such that it is never really in the interests of the mineral/land owner to have that extension option in the original deal.
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