The gas lease terms that matter most are the royalty rate and what can be deducted from it, how long the lease lasts, what happens to land outside a producing unit, and how your surface and water are protected. A lease is a long-term contract that can bind your family for decades. Read every clause before you sign, and compare offers instead of accepting the first one.
This guide covers the clauses Washington and Allegheny County owners see most often. It is part of our oil and gas law resources. If you already have an offer in hand, our page on having a lease reviewed before signing explains that process.
Key takeaways
– Royalty rates and bonus payments vary by company, location, and timing. Compare more than one offer.
– The deductions clause can matter as much as the royalty rate itself.
– A Pugh clause can release land and depths that are not being produced.
– Pennsylvania has no general forced pooling law for Marcellus wells, so the pooling clause in your lease controls a great deal.
– Surface, water, and pipeline terms protect the land you live on and farm.
Before you start: paid-up lease vs rental lease
A paid-up lease is a lease where the bonus payment covers the whole primary term. You receive no annual rental payments to keep the lease alive. A rental lease requires the company to pay a delay rental (a yearly payment to keep the lease in force without drilling).
Most Marcellus leases offered today are paid-up leases. That means the bonus is often the only money you see until a well produces. Read the bonus terms closely. Note when it is paid, whether it depends on title approval, and whether the company can back out before paying.
Key gas lease terms, clause by clause
The table below summarizes the oil and gas lease clauses covered in this guide. The sections that follow explain each one.
| Clause | What it controls | Question to ask |
|---|---|---|
| Royalty and deductions | Your share of revenue and what is subtracted | What costs, if any, can come out of my royalty? |
| Primary term and extensions | How long the company has to drill | Can the company extend without my consent? |
| Pugh clause | Release of unproduced land and depths | Is there a horizontal and vertical Pugh clause? |
| Shut-in | Keeping the lease alive without production | How long, and what is paid? |
| Depth severance | Which formations are leased | Are deeper zones included? |
| Pooling and unitization | Combining your land with others | Are there size limits and consent rights? |
| Surface protections | Where the company can build | Do I approve locations? |
| Water | Use of your water and protection of wells and springs | Is testing required? |
| Pipelines | Rights-of-way across your land | Are pipelines covered here or in a separate agreement? |
| Assignment | Transfer to another company | Do my protections follow the lease? |
| Indemnity | Who pays for damage and claims | Is the company required to protect me? |
Royalty rate and deductions
The royalty is your share of production, paid without sharing drilling costs. Pennsylvania’s minimum royalty law, 58 P.S. § 33, requires at least one-eighth. The Pennsylvania Supreme Court held in Kilmer v. Elexco Land Services, 990 A.2d 1147 (Pa. 2010), that the one-eighth is measured at the well, so some post-production costs can be deducted unless the lease says otherwise.
That makes the deductions language critical. Post-production costs include gathering, compression, processing, and transportation of gas after it leaves the well. Some leases allow these deductions; others limit or bar them. Look for clear words about the point of valuation and which costs, if any, may be subtracted.
Royalty rates and bonus amounts vary widely. We do not publish typical figures because they change with location, geology, and timing. The practical step is to compare written offers and ask what the deduction terms are in each one.
Primary term and extensions
The primary term is the fixed period the company has to start drilling or production. After that, the lease usually continues as long as gas is produced, which is called the secondary term. Watch for option-to-extend clauses that let the company add years by paying again. Ask whether the extension payment matches the original bonus and when it must be paid.
Pugh clause
A Pugh clause releases parts of the lease that are not included in a producing unit. Without one, a single well on a small part of your land can hold the entire property for decades.
- A horizontal Pugh clause releases acreage outside the unit.
- A vertical Pugh clause releases depths below (or above) the producing formation.
Read the timing. Some Pugh clauses apply at the end of the primary term. Others apply later or only after certain conditions.
Shut-in clause
A shut-in clause lets the company keep the lease alive when a well is capable of producing but is not selling gas. Common reasons include waiting on a pipeline. Check how much is paid, how often, and whether there is a limit on how long the lease can be held by shut-in payments.
Depth severance
Many leases cover all depths. A depth severance clause limits the lease to certain formations, such as the Marcellus, and keeps deeper zones, such as the Utica, available for a separate lease later. Whether that makes sense depends on your goals and the offers available.
Pooling and unitization
Pooling combines your tract with neighboring tracts to form a drilling unit. Pennsylvania has no general forced pooling statute for Marcellus wells. The Oil and Gas Conservation Law, 58 P.S. § 401 et seq., applies to wells that penetrate the Onondaga horizon. Act 64 of 2013, 58 P.S. § 34.1, allows cross-unit drilling when the lease permits pooling.
Because of these rules, the pooling clause in your lease does much of the work. Look for limits on unit size, a requirement that you receive notice and a copy of the unit declaration, and whether your consent is needed for changes.
Surface protections
Under the Oil and Gas Act, 58 P.S. Ch. 32 (Act 13 of 2012), operators must follow setback and notice rules. A lease can go further. Consider requiring your approval of well pad, road, and equipment locations. Address fencing, restoration, timber, crops, livestock, and noise. Many owners handle detailed terms in a separate surface use agreement.
Water
Address whether the company may use your ponds, streams, or wells. Ask for baseline testing of your water supply before drilling and follow-up testing after. Set out what happens if a water supply is affected.
Pipelines
Some leases grant broad pipeline rights across all of your land, including lines that carry gas from other properties. Consider limiting pipelines to gas from your own land or unit, or requiring a separate right-of-way agreement with its own payment and restoration terms.
Assignment
Most leases allow the company to assign (transfer) the lease. Make sure every protection you negotiate binds future owners. Ask for written notice of any assignment so you know who is responsible.
Indemnity
An indemnity clause requires the company to protect you from claims and costs caused by its operations. Look for coverage of environmental harm, injuries to workers and visitors, and damage to your property. Ask whether the company must carry insurance.
Free download: Pennsylvania Gas Lease Review Checklist → /gas-lease-checklist/
A clause-by-clause list you can use to compare offers side by side.
Steps to take before you sign
- Confirm what you own. Check your deed and the Washington County Recorder of Deeds records. Our page on confirming your mineral ownership explains why that matters.
- Get offers in writing. Ask each company for its full lease form, not only a summary.
- Compare the whole package. A higher royalty with broad deductions may pay less than a lower royalty with limited deductions.
- Mark every clause you do not understand. Ask the landman for written answers.
- Have the lease reviewed. A lawyer can propose an addendum (a set of added terms that override the printed form).
- Keep copies of everything. Save the signed lease, addendum, and any recorded memorandum of lease.
Frequently asked questions
What is a Pugh clause in a gas lease?
A Pugh clause releases parts of your land that are not included in a producing unit. A horizontal Pugh clause frees acreage outside the unit. A vertical Pugh clause frees depths that are not producing. Without one, a small producing area can hold your entire property under lease.
What is a paid-up lease?
A paid-up lease is one where the signing bonus covers the full primary term. The company does not pay annual delay rentals to keep the lease in force. That means the bonus may be the only payment you receive until a well produces gas on your land or unit.
What is a fair royalty rate for a Marcellus Shale lease?
Rates vary by company, location, and timing, so there is no single fair number. Pennsylvania law sets a one-eighth minimum. Compare several written offers and look at deduction terms, because a higher rate with broad deductions can pay less than a lower rate without them.
Can a gas company drill on my land without a lease in Pennsylvania?
Generally, a company needs a lease or other right from the mineral owner. Pennsylvania has no general forced pooling law for Marcellus wells. Different rules can apply to deeper wells that penetrate the Onondaga horizon, so have your situation reviewed if a company says it can proceed without you.
Can I negotiate gas lease terms?
Yes. Many companies accept an addendum that changes the printed form. Common requests include limits on deductions, a Pugh clause, surface approval rights, water testing, and pipeline limits. Whether a company agrees depends on the company and the property.
Get your lease reviewed
Before you sign, we can review the offer, explain each clause, and propose changes. Call (304) 982-1586 or request a consultation. After you call, we will ask for a copy of the lease offer and your deed, then schedule a meeting to go through it. We work with owners across Cecil Township and the surrounding area.
About the author: Daniel B. Kostrub is an attorney at Kostrub Law Firm, PLLC, where he focuses on energy law, oil and gas transactions, title opinions, division orders, mineral rights, and lease review. Read Dan’s bio.
This page is general information, not legal advice. Reading it does not create an attorney-client relationship.