The Evolution of Oil, Gas and Mineral Lease: From the Basics to Specialized Terms

Like 1970s apparel making an appearance in modern trends, let's revisit a classic and update it with some modern twists: the oil, gas and mineral lease. 

Historical Background

As you no doubt already know, the Oil, Gas and Mineral Lease is both a contract and a conveyance. It fulfills the tenets of a contract because it contains elements of time, payment, and terms. It fulfills the dual role of conveyance because its effectiveness is not only tied to a finite amount of time (the primary term) but may continue perpetually if oil, gas or other minerals are produced (the secondary term); the secondary term might just last until the end of time (or at least until production stops).

Leasing for oil and gas exploration dates back to the early 19th century in parts of Texas and other states when the original oil fortunes were amassed. Through the decades the document used to memorialize became more or less standardized and encountered relatively view variations from the 1940s through the 1970s. From the 1970s through the early 2000s various new and exciting terms made an appearance, but the base of the Lease retained its integrity. This period witnessed the introduction of the first versions of the "Pugh" clause, or severance clauses based on time.

However, beginning in 2007, or thereabouts, and continuing through the present (2024 at the time of this article) there has been an explosion of specialized leases, terms conditions used in OGMLs. In fact, a specialized lease is the standard in many ways, even though the implications of the specialized terms range in effect. 

To illustrate the evolution of the Lease, let's begin with the foundation and build from there...

The Basics

In almost all OGMLs these terms will still be found in some form, although they may occur in a different order.

• Grantor/Grantee
  • The Buyer and Seller, or Lessor and Lessee
• Description
  • The Legal Description of the Property that would allow the Property to be physically located
• Primary Term and Secondary Term
  • Primary term - a set number of months or years in which the Lessee has the right to explore for and extract oil, gas and other minerals.
  • Secondary term - an undefined length of time whereby the Lessee may continue to explore and extract so long as production is continuous and ongoing.
• Royalty (including shut-in royalty)
  • Describes the portion of revenue generated from production that the Lessor is entitled to be paid.
• Pooling
  • Allows multiple tracts to be combined, or pooled, into a larger tract in order to make exploration more effective and efficient.
• Operations
  • Is a Savings Clause which allows the perpetuation of the Lease, and thus the rights to explore and extract, so long as the Lessor is operating the Well(s) on the Property.
• Warranty, along with proportionate reduction
  • Warranty - a warranty of title issued by the Lessor guaranteeing that the Lessor owns what was claimed in the Lease
  • Proportionate Reduction - states that if the Lessor does not own 100% of the mineral estate, then the royalties paid will be reduced proportionately. 
• Signature Block, including Notary
  • Memorialize the Lease in such a way as to satisfy the Statute of Frauds.

The Changes

Over the past two decades, it has become more and more common to see additional and specialized terms injected into Leases or included in an Exhibit. In fact, this practice is so commonplace as to make it the norm instead of the exception. 

These specialized terms can introduce new concepts or modify some of the foregoing provisions traditionally made a part of Leases. Examples of these specialized provisions and terms are...

• Oil and Gas limitation
  • This limits the lease to ONLY the production of oil and gas; sulphur could not legally be produced.
• Cost-free Royalty
  • This provision eliminates the Lessee from deducting processing costs from the Lessor's Royalty.
• Limited Shut-in
  • This provision modifies the typical Shut-In Royalty provisions to limit both the continuous and aggregate lengths of tie the provision could be employed to keep a Lease active.
• Sophisticated "Pugh" Clauses
  • Horizontal Severance - After the expiration of the Primary Term, all of the Property not pooled into a Unit (a group of tracts), is automatically excluded from the Lease.
  • Vertical Severance - After the expiration of the Primary Term, all depths underlying the Property not presently under production, are automatically excluded from the Lease.

In recent years, it has not been uncommon to find provisions relating to water usage, service road construction, vegetation restoration, surface use restrictions, seismic exploration, or other terms that may relate specifically to the Property's needs or the Lessor's desires. 

In short, there are few "typical" oil, gas and mineral leases in the modern era of exploration. As a result, most landowners benefit from having at least one additional pair of eyes review a Lessee's offering before putting ink on paper. In an ever changing and adjusting energy landscape, success can be enhanced through the wisdom of experience. 

 If you find yourself with questions about what-means-what in the oil and gas lease you have been offered, seek a professional. I have reviewed, drafted and negotiated thousands of these instruments and would be serve as that second set of eyes. 

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