5.4: Leasing Phase

Last updated
Save as PDF

Page ID: 15583

Marcellus Matters
Pennsylvania State University via John A. Dutton: e-Education Institute

\( \newcommand{\vecs}[1]{\overset { \scriptstyle \rightharpoonup} {\mathbf{#1}} } \) \( \newcommand{\vecd}[1]{\overset{-\!-\!\rightharpoonup}{\vphantom{a}\smash {#1}}} \)\(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\) \(\newcommand{\id}{\mathrm{id}}\) \( \newcommand{\Span}{\mathrm{span}}\) \( \newcommand{\kernel}{\mathrm{null}\,}\) \( \newcommand{\range}{\mathrm{range}\,}\) \( \newcommand{\RealPart}{\mathrm{Re}}\) \( \newcommand{\ImaginaryPart}{\mathrm{Im}}\) \( \newcommand{\Argument}{\mathrm{Arg}}\) \( \newcommand{\norm}[1]{\| #1 \|}\) \( \newcommand{\inner}[2]{\langle #1, #2 \rangle}\) \( \newcommand{\Span}{\mathrm{span}}\)\(\newcommand{\AA}{\unicode[.8,0]{x212B}}\)

Leasing privately held mineral rights is a complex process. The U.S. is nearly unique in having private ownership of mineral rights. In most countries, the government holds rights to mineral extraction. In the United States, the oil and gas leasing process is not regulated and takes the form of a legal contract between the landowner (the lessor) and the operator (the lessee). The purpose of a lease or a purchase contract is to convey the rights of exploration and production to an oil and gas development company.The ultimate goal of the leasing process is to produce an agreement between a landowner and an operator in which mineral rights are leased to the operator in exchange for a recurring rental payment and royalties from any oil or gas produced on the land.It is almost always the case that a "land man" representing an operator approaches the landowner. Since lease agreements involve significant amounts of money and are complex, one should obtain advice from an attorney who has expertise in mineral transactions and Pennsylvania Oil and Gas Law. Since producers have detailed knowledge of the best location to drill for oil and gas, as well as a large number of potential lessors, they tend to have the upper hand in oil and gas negotiations

Importantly,the property owner has rights as regards the surface and protections afforded by state laws. Surface owners leasing subsurface minerals can, through a well-constructed contract,protect crops, livestock, buildings, personal property, access and any other aspects of their surface holding for the duration of a lease. Although lessees will often accept significant revisions to their standard lease or sales contract, they can reject them.

A lease does not necessarily entitle an energy company to drill on a property. The company must first obtain a permit from the state regulatory authority (in PA this is the Department of Environmental Protection), which requires a detailed plan for drilling a specific target formation.The permit insures regulatory protections and makes the drill site subject to inspections.