Ohio Oil and Gas Lease Terminology

August 13, 2012

Oil and Gas Leases

Ohio oil and gas leaseCrude oil and natural gas are burgeoning businesses in Ohio.  New drilling methods, such as fracking, have been developed over the last ten years and aim to maximize production.  Oil and gas leases tend to be complicated and use terminology that is not contained in other types of contracts and leases. The following outlines some common oil and gas lease terminology: 

Habendum Clause—This is typically the opening clause of an oil or gas lease and it contains the explanation of the mineral rights that are being granted, other rights granted in the use of the property for drilling, access road locations, drilling equipment storage locations, and other details about the rights that are being granted to the lessee (Drilling Company) by the owner of the property(Lessor).

Paying Quantities—This is a mathematical evaluation of the income, if any, that the oil or gas well is producing.  If there are no paying quantities, then the lease can be terminated by its own terms.  A calculation of paying quantities should be based on average production over several months to a year or so of time.  Usually, a sub-part of the habendum clause contains the paying quantities terms of the lease.

Primary Term—This is the length of time that the lessee has to start drilling the oil or gas well after the lease is signed by both parties.  The time frame is usually less than 10 years, and can be as little as one year.  The property owner should attempt to keep the primary term as short as possible so as to get royalties and other benefits from the well as soon as possible.  If the primary term passes there can be provisions in the lease for the lessee to pay the property owner more money to extend the time, but that depends on the original terms of the lease.

Secondary term—This occurs after the oil or gas well has been drilled. There will be a provision in the oil or gas lease that the lease will continue until such time that paying quantities are not being produced.  Once there are no more paying quantities, the lease is typically terminated.

Royalty—Refers to the share of oil and/or gas proceeds produced from the well which the property owner is entitled to.  The share due to the property owner is 12.5% or 1/8th, but that can be calculated using either gross production or net proceeds.  Most leases use gross production to determine the royalties.

Free Gas—This provision allows the owner of the property to use free natural gas that the well produces.  There is almost always a clause in the lease that limits the use of the gas, both in amount of gas per month, and what it can be used for.  If the free gas is going to be used to heat your home, then you may want to reference recent gas bills over about one year’s time to determine whether or not the lease permits enough gas to cover your usage.

Water Use—Most drilling leases provide the lessee with the ability to use water that is on your property.  The amount of water that they use will depend on the type of well that they drill.  Sometimes the amount of water used to drill one well is in the millions of gallons, so you should be aware that this could be an issue and look for a limit amount on the water usage.

Implied Covenants—These are a promise by the driller to the property owner that the property will be developed in a reasonable manner to get the most production out of the oil or gas well to maintain paying quantities and royalties.  If an implied covenant is breached by the driller, the lease will likely be terminated.  The property owner should make certain that an implied covenant is part of the leases terms, so in the event that there is issues, the lease can be terminated as soon as possible.

These are just a few of the commonly used terms contained in oil and gas leases.  Most people have never heard of these, and will almost certainly encounter difficulty understanding what they are signing when they sign the lease.  It is advisable to have an experienced oil and gas lawyer review any lease before you sign it, to prevent any harm to your property or your finances.  Please contact Slater & Zurz LLP by calling  1-800-297-9191 for a free consultation or send us a blog message to set up a time to discuss an oil and gas lease evaluation.  We can deal with the drilling company to make sure that you get everything out of your property that you deserve.

To learn more about oil and gas leases in Ohio, please visit oilgasleaseohio.com.

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About slaterzurz

Slater & Zurz LLP is an Ohio law firm of highly experienced and respected attorneys. Over the last 40 years, we have developed a reputation for getting positive results for clients. We've been trusted with handling over 20,000 personal injury cases and our clients have received more than $120,000,000.

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