What are the terms of an oil and gas lease?

What are the terms of an oil and gas lease?

On Behalf of | Jun 15, 2022 | Commercial Real Estate |

An oil and gas lease is important to protect your rights whether you are the lessee or lessor. The Mississippi State University explains there are two main parts to any oil and gas lease.

Understanding each part will enable you to get the most from the agreement.

Primary term

The first part of the lease is the primary term. This term outlines the number of years the agreement is in effect prior to the beginning of drilling. You can negotiate this as needed. A common primary term is five years. It is a good idea to set this time. Do not let it automatically renew or give the other party the ability to decide when it ends. Maintain strict details and ensure you both benefit from the agreement made.

Secondary term

The secondary term represents the time from the beginning of drilling. It does not have a set limit. The end of this term is when production stops, which is something you may not know when you sign the lease. So, it is changing even once you sign the agreement.

Setting these terms is important because they determine who has control. If the lessor maintains control, it can be detrimental to the lessee. On the other hand, if the lessee has too much control, it can impact the lessor’s rights. There should be a good balance that benefits both parties while also offering chances for competitiveness and the ability for everyone to financially benefit from the arrangement. Because of the complexity of an oil and gas lease, parties should have legal representation to ensure the agreement is fair and will not inhibit anyone’s ability to get the most from the arrangement.