Lease Your Land For Oil and Gas Production
(Page 2 of 4)
January/February 1984
By Tom Bigelow
SHORT VERSUS LONG TERM
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Of course, the length of the lease also affects the amount of compensation the owner can expect to receive. The shorter the lease, the less the payment. By the same token, the longer you agree to tie up your land, the more rent the well operator will be willing to pay.
Generally speaking, the smaller, independent petroleum companies are often able to move in and drill a well more quickly than the larger corporations can, so they're usually more willing to accept a shorter lease (for six months, one year, or two years). The major oil companies, however, tend to be more interested in larger blocks of land and longer leases . . . in order to allow them plenty of time to conduct seismic and geomorphic work before drilling. Either way, if a lease expires before the well operator has completed an exploration program, he or she must negotiate a new one. This is because the oil and gas rights revert back to the landowner once a lease ends . . . unless a successful well has been drilled.
Note the implications of that last phrase. It means that if a well has been completed and is producing by the time the lease expires, the operator owns the rights to extract from that well for as long as it remains productive (which, most of' the time, is from 10 to 20 years).
SHARING THE PROFITS
On the average, a landowner receives a one-eighth interest in a producing well drilled on his or her property. In highly competitive, very productive areas, he or she may get a three-sixteenths share, or perhaps even a one-fourth interest on the well. Such fractions can add up to a significant income.
For example, based on the current price of $29 per barrel of crude oil, the landowner with a one-eighth interest on one well could expect to receive about $3.60 for every barrel of oil produced (a barrel equals 42 U.S. gallons). Considering that the average well in the U.S. produces about ten barrels of oil a day (and that estimate is conservative), the landowner would pocket a monthly royalty totaling $1,080!
In addition, if the lease involves a large tract of land, the well operator may initiate a multiple-well program that would entitle the owner to a monthly royalty check for each successful well. (On the other hand, of course, a well driller may just as likely come up with nothing but dry holes, in which case the landowner would receive no compensation beyond the original "per acre" lease fee.)
