Texas Oil & Gas Academy is here to assist you with any oil and gas related questions you may have.
What components make up a good lease
for the mineral owner?
How will I know when my leased minerals
will go into a unit?
Box 3
Box 4
OIL AND GAS LEASE AGREEMENT
This Oil and Gas Lease (“Lease”) is made and entered into on this ___ day of ________, 20, by and between:
Lessor: John Doe
Address: __________________________
and
Lessee: ABC Energy, LLC
Address: __________________________
1. GRANT OF LEASE
Lessor hereby grants, leases, and lets exclusively to Lessee the right to explore, drill, produce, and market oil, gas, and associated hydrocarbons from the lands described below.
2. LEASED PREMISES
The leased premises consist of ___ net mineral acres located in:
Section: ___
Township: ___
Range: ___
County: __________
State: Texas
3. PRIMARY TERM
This Lease shall remain in force for a term of three (3) years from the date hereof (“Primary Term”), and as long thereafter as oil or gas is produced in paying quantities.
4. BONUS PAYMENT
Lessee agrees to pay Lessor a lease bonus of $1,500 per net mineral acre, payable upon execution and delivery of this Lease.
5. ROYALTY
Lessee agrees to pay Lessor a royalty of 20% (one-fifth) of the gross proceeds received from the sale of oil and gas produced from the leased premises.
6. POOLING
Lessee shall have the right to pool or unitize the leased premises with other lands to form a drilling or production unit. Production from such unit shall be treated as production from this Lease.
7. SHUT-IN ROYALTY
If a well capable of producing is shut in, this Lease may be maintained by payment of $1.00 per net mineral acre per year.
8. DEPTH CLAUSE
At the end of the Primary Term, this Lease shall terminate as to all depths below the deepest producing formation unless otherwise held by production.
9. ASSIGNMENT
Lessee may assign this Lease, in whole or in part, to any party. This Lease shall remain binding on all successors and assigns.
10. WARRANTY OF TITLE
Lessor warrants title to the leased premises, subject to limitations stated herein.
11. FORCE MAJEURE
This Lease shall not terminate due to delays caused by events beyond Lessee’s control, including but not limited to acts of God, government regulations, or equipment failure.
12. GOVERNING LAW
This Lease shall be governed by the laws of the State of Texas.
13. SIGNATURES
LESSOR: ___________________________
Date: __________
LESSEE: ___________________________
Date: __________
⚖️ Good vs Bad Oil & Gas Lease Clauses
💰 Royalty Clause
✅ Good Clause (Mineral Owner Friendly)
Royalty is based on gross proceeds received, with no deductions for post-production costs.
🚩 Bad Clause (Operator Friendly)
Royalty is based on “net proceeds” and allows deductions for compression, transportation, and processing.
Why it matters:
This can reduce your royalty income by 10%–30% or more over time.
⛏️ Pugh Clause (Acreage Release)
✅ Good Clause
Releases all non-producing acreage at the end of the primary term.
🚩 Bad Clause
No Pugh clause—all acreage is held by one producing well.
Why it matters:
Without this, thousands of acres can be tied up by a single well.
🧱 Depth Clause
✅ Good Clause
Releases all formations below the deepest producing zone.
🚩 Bad Clause
No depth limitation—all depths remain leased indefinitely.
Why it matters:
You may lose the ability to lease deeper formations in the future.
🔄 Continuous Development Clause
✅ Good Clause
Requires the operator to continue drilling to hold additional acreage.
🚩 Bad Clause
No requirement—operator can hold large acreage with minimal activity.
Why it matters:
Encourages development instead of letting your minerals sit idle.
🛑 Shut-In Clause
✅ Good Clause
Limits shut-in payments to 1–2 years maximum with reasonable payment amounts.
🚩 Bad Clause
Allows indefinite shut-in with minimal payments.
Why it matters:
Prevents leases from being held without actual production.
🗺️ Pooling Clause
✅ Good Clause
Sets reasonable unit size limits (e.g., 640–1,280 acres).
🚩 Bad Clause
No limits—operator can create oversized units.
Why it matters:
Larger units dilute your royalty interest.
💵 Bonus Payment Clause
✅ Good Clause
Bonus is paid upon signing or delivery, with clear timing terms.
🚩 Bad Clause
Payment delayed for title review or undefined timeframes.
Why it matters:
You may sign a lease and wait months—or never get paid.
🔁 Assignment Clause
✅ Good Clause
Requires notice of assignment and holds operator accountable.
🚩 Bad Clause
Allows unrestricted assignment with no notice to the owner.
Why it matters:
You may end up dealing with an unknown or less reputable operator.
⚠️ Warranty Clause
✅ Good Clause
Limited or no warranty of title
🚩 Bad Clause
Full warranty of title required
Why it matters:
You could be financially responsible for title defects.
🌪️ Force Majeure Clause
✅ Good Clause
Clearly defined events with reasonable time limits
🚩 Bad Clause
Broad language allowing indefinite delays
Why it matters:
Can extend your lease without drilling or production.
🔑 Key Takeaway
A lease is not just about the bonus—it’s about the fine print.
The difference between a good and bad clause can mean:
Thousands (or hundreds of thousands) of dollars in lost income
Years of your minerals being tied up unnecessarily
Limited future leasing opportunities
Lease Terms Control Your Long-Term Income
💡 Key Idea
The lease you sign determines how much money you make—not just today, but for decades.
📌 What to Know
• Royalty Rate: Typically 12.5% to 25%
• Bonus Payment: One-time payment per net mineral acre
• Primary Term: Usually 2–5 years
⚖️ Important Clauses
• Royalty Clause (Gross vs. Net): Ensures you are paid on gross proceeds
• No Deductions Clause: Prevents post-production costs from reducing your royalty
Not All Lease Offers Are Equal
💡 Key Idea
Two leases can look similar—but produce very different long-term income.
📌 What to Know
• Higher royalty is often more valuable than a higher bonus
• Lease terms vary by operator, location, and activity
• Market conditions can change quickly
⚖️ Important Clauses
• Most Favored Nations Clause: Ensures you receive terms equal to nearby leases
• Bonus Payment Clause: Defines when and how you get paid
Protect Your Minerals with the Right Clauses
💡 Key Idea
Without protective language, your minerals can be tied up for years with little or no benefit.
📌 Key Protections to Include
• Pugh Clause (Horizontal & Vertical): Releases unused acreage or depths
• Depth Clause: Frees formations below producing zones
• Continuous Development Clause: Requires ongoing drilling activity
• Shut-In Clause Limits: Prevents leases from being held indefinitely without production
🧠 Why It Matters
These clauses ensure your minerals are actively developed—or returned to you.
Pooling and Unitization Affect Your Royalties
💡 Key Idea
Your royalties are based on your share of a drilling unit—not just your acreage.
📌 What to Know
• Units are typically 640–1,280+ acres
• Your royalty is proportional to your share of the unit
• Wells may not be physically located on your property
⚖️ Important Clauses
• Pooling Clause: Allows your minerals to be combined with others
• Unit Size Limitation Clause: Prevents oversized units that dilute your interest
Read the Fine Print Before You Sign
💡 Key Idea
Small details in a lease can have major financial consequences over time.
📌 What to Review Carefully
• Automatic extensions
• Assignment rights (can the lease be sold to another company?)
• Title warranty requirements
• Broad force majeure provisions
⚖️ Important Clauses
• Assignment Clause: Controls transfer of the lease
• Warranty Clause: Limits your liability for title issues
• Force Majeure Clause: Defines allowable delays
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