“Learn from the mistakes of others. You can’t live long enough to make them all yourself. ”
– Eleanor Roosevelt
If you leave with anything from this post today, leave with this – Leasing mineral rights in North Dakota or any other state should be considered a ONE TIME opportunity and you need help to make the best of it.
To keep it simple, when you execute a lease agreement with an oil and gas company you are granting them access to your minerals for a certain term. However, if they drill a well and find oil or gas on your property, the lease you signed will last as long as that well is producing, which may be a very, very long time.
Look, we get it. There is a lot of money being passed out to mineral owners in North Dakota and it is human nature to get excited when potentially life changing events are within reach. However, an offer from a company looking to lease mineral rights should be considered only the first step of a process. We highly recommend you spend some time learning as much as you can about lease agreements and get some expert advice before signing anything.
Have you received an offer to lease?
If you have received an offer to lease, you must consider the offer terms carefully. Let’s begin with the basics. An offer to lease your property consists of three primary elements:
Lease Bonus:
When leasing mineral rights in North Dakota, the “paid up front” lease bonus is the biggest lure for most owners. The payment is typically a certain number of dollars per acre, paid in one lump sum regardless of whether the operator drills during the term. It is easy for mineral owners to get blinded by the large up front bonuses and never consider the many other important factors of a successful lease agreement.
Royalty Percentage:
The royalty percentage is the fee an oil and gas operator pays the mineral owner for actual production from a producing well. This fee can and should be negotiated.
At a minimum, you should expect a 12.5% royalty, but mineral owners in North Dakota are now seeing higher percentages. Owners leasing mineral rights in North Dakota are now finding 18 – 20% more common.
Mineral owners need to carefully consider the balance between the lease bonus and the royalty percentage. We ask our visitors to consider a teeter totter. The higher bonus you receive today will very likely reduce the royalty percentage you can expect tomorrow. As one goes up, the other will usually go down, so it is important to consider both your short term and long term goals.
Term and Optional Extension:
Every lease agreement will have a primary term. The primary term is the initial amount of time you as a mineral owner are granting the operator to drill a well. This is often 3 to 5 years. In most cases, the operator will request an optional extension to the term for 1-3 years standard.
A few important hints:
- The optional extension is optional. You do not have to accept it.
- If you accept the optional extension, do not lock yourself into the same lease bonus. Ask for a higher bonus.
- We prefer not to have optional extensions on lease agreements, but we never recommend anything longer than 2 years.
Our Recommendation
Get Help. That is our recommendation. Find a really good oil and gas attorney to help you negotiate the best lease or contact us using the form below. As you can imagine, their a number of other very important clauses that should be made a part of the lease agreement that we have not touched on. Please consider reaching out to us if you have questions.
