Landowners in Pennsylvania often receive offers from energy companies seeking to lease mineral rights for oil and gas development. These leases can provide significant income, but they also carry risks that landowners must consider carefully. Knowing how to negotiate an oil and gas lease protects your property and financial interests while allowing you to benefit from the resources beneath your land.
What an Oil & Gas Lease Covers
An oil and gas lease is a contract between a landowner and an energy company. The landowner grants the company the right to explore for and extract oil, natural gas, and sometimes other minerals from the property. In exchange, the landowner receives a signing bonus and royalty payments based on production.
The lease specifies the terms of this arrangement, including how long the company has to begin drilling, what percentage of production goes to the landowner, and what activities are permitted on the surface of the property. Every term in the lease can be negotiated, though energy companies often present their standard form as if it cannot be changed.
Key Lease Terms to Negotiate
Bonus Payment
The bonus payment is the upfront amount paid when you sign the lease. This amount varies based on location, market conditions, and the perceived value of the minerals. In active drilling areas, bonuses can range from a few hundred dollars per acre to several thousand. Research recent lease transactions in your area to get a sense of current market rates.
Royalty Rate
The royalty rate determines what percentage of production revenue you receive. Pennsylvania law requires a minimum royalty of 12.5 percent, but landowners often negotiate higher rates. The standard rate in active drilling areas has risen to 15, 17.5, or even 20 percent in some cases. A higher royalty rate can mean significantly more income over the life of a producing well.
Be careful about how the royalty is calculated. Some leases allow the company to deduct post production costs like transportation, processing, and compression before calculating your royalty. A lease with a gross royalty provision ensures you receive your percentage based on the full value of the gas at the wellhead without deductions.
Lease Term & Held by Production Clauses
The primary term is the initial period during which the company must begin drilling or the lease expires. This typically ranges from three to five years. Once production begins, the lease is often held by production, meaning it continues as long as the well produces in paying quantities.
Negotiate for a shorter primary term if possible. This limits how long your land is tied up if the company decides not to drill. You should also include provisions that define what constitutes production and prevent the company from holding the lease indefinitely with minimal production.
Surface Use Protections
While mineral rights are the focus of the lease, the company needs access to the surface to conduct operations. The lease should specify where equipment can be placed, what roads can be built, and how the surface will be restored after drilling is complete.
Consider including setback requirements that keep wells, tanks, and other equipment a certain distance from your home, barns, and water sources. You can also negotiate for surface damage payments that compensate you for disruption to your property during operations.
Water Protection
Drilling operations use large amounts of water and produce wastewater that must be managed properly. Your lease should address water rights, prohibit the use of your water sources without permission, and require the company to conduct water testing before and after drilling. Pennsylvania regulations require baseline water testing, but your lease can specify additional protections.
Environmental Protections
Include provisions requiring the company to comply with all environmental laws and regulations. You can also require reclamation of disturbed areas, removal of equipment when the lease ends, and indemnification for any environmental damage. These provisions protect you from liability and help ensure your property is returned to usable condition.
Working With an Attorney
Oil and gas leases are legal contracts with long lasting consequences. Having an attorney review any lease before you sign is strongly recommended. An attorney experienced in oil and gas law can identify terms that favor the company, suggest modifications, and negotiate on your behalf.
In Western Pennsylvania, where natural gas development has been active for over a decade, many attorneys have developed expertise in this area. They understand industry practices, current market terms, and how courts have interpreted various lease provisions. This knowledge can help you negotiate a better deal.
Avoiding Common Mistakes
Landowners sometimes make mistakes when negotiating leases. Signing without reading the entire document, accepting the first offer without negotiating, and failing to understand key terms all lead to regret later. Take your time, ask questions, and do not let the company pressure you into signing quickly.
Another common mistake is failing to consider how the lease affects your entire property. If you plan to sell your land, develop it, or pass it to heirs, the lease terms will affect those plans. A lease that seems acceptable today may create problems years from now.
Oil and gas leases represent a significant financial opportunity for Pennsylvania landowners. By negotiating carefully and seeking professional advice, you can maximize the benefits while protecting your land and your rights.