Negotiating a Fair Oil & Gas Leasefor Your Client

Lisa C. McManus, Attorney at Lawlisa.mcmanus@mcmanuslaw.net | 814.781.1319

Evolution of the Oil and Gas Lease

To have and to hold for a term of five years and for so long thereafter as oil or gas are produced.

This Lease shall remain in force for a primary term of FIVE (5) years from 12:00 AM. April 23, 2010 (effective date) to 11:59 P.M. April 22, 2015 (last day of primary term) and shall continue beyond the primary term as to the entirety of the Leasehold if any of the following is satisfied: (i) operations are conducted on the Leasehold or lands pooled/unitized therewith in search of oil, gas, or their constituents, or (ii) a well deemed by Lessee to be capable of production is located on the Leasehold or lands pooled/unitized therewith, or (iii) oil or gas or their constituents are produced from the Leasehold or lands pooled/unitized therewith, or (iv) if the Leasehold or lands pooled/unitized therewith is used for the underground storage of gas or for the protection of stored gas, or (v) if prescribed payments are made or (vi) if Lessee's operations are delayed, postponed or interrupted as a result of any coal, stone or other mining or mining related operation under any existing and effective lease, permit or authorization covering such operations on the leased premises or on other lands affecting the leased premises, such delay will automatically extend the primary or secondary term of this oil and gas lease without additional compensation or performance by Lessee for a period of time equal to any such delay, postponement or interruption.

vs.

Initial Considerations

• The Lessee’s Reputation• The Leasing Landscape• Developing a Rapport with the Lessee• Early Agreement as to Key Terms

Commonly Negotiated Lease Terms

• Leasing Clause. Include only oil & gas and their constituents

• Description. Evaluate application of Mother Hubbard clause

• Bonus. Inclusion of actual consideration• Extension of Primary Term. Right to renew/first refusal• Delay Rentals. Paid-up Lease v. Delay Rentals• Shut-In. Time limitations• Warranty. No general warranty!• Limitation of Forfeiture. Not prohibition of forfeiture• Implied Covenants. Watch for conflicting language

The Term of the Lease

• As long as operations are conducted• Commencement of operations• Presence of well deemed by Lessee to be capable of production • Oil or gas or their constituents are produced

Commercially paying quantities• Storage of gas• Operations/production/storage on lands that are pooled/unitized• Prescribed payments are made

Royalties• Initial rate• GMRA• Post-production costs

– Those paid to the operator’s affiliate/subsidiary – Those paid to third-parties in arms’ length,

commercially reasonable transactions• Skirting the GMRA• Show me the money

Pooling, Unitization, and Pugh Clauses

• Pooling generally refers to integration of smaller tracts of land to obtain a drilling permit to comply with the state’s spacing rules – applies only to drilling penetrating Onondaga

• Unitization refers to the consolidation of fee or leasehold interests covering a common source of oil or gas in order to most efficiently extract the oil and gas

• Pugh Clause v. Unitization Limitations (e.g., 50%)• Depth v. Acreage Unitization Limitations

Surface Use

Provisions regarding surface use often include the following:a. setback requirementsb. consent to the location of pipelines and drill padsc. burial depth of pipelinesd. compensation for damage to growing crops, pastures, and timber; erosion of soil; fences, barns, and other structures; water pollutione. road constructionf. reclamation

Remember that the dominant tenement has the right to access its oil & gas estate even if injury to the surface/servient tenement occurs provided the use is reasonable and necessary

Questions?