If someone discovers oil or gas on your property, expect interested calls from energy companies hoping to strike a deal. Selling or leasing the mineral rights can turn into a real windfall, but the size of the windfall depends on how well you negotiate and deal. If you own surface rights to the property too, there are several risks to guard against when you draft the lease agreement.
TL;DR (Too Long; Didn't Read)
Someone who discovers oil or gas on your property might offer to buy the mineral rights or set up a lease agreement that can reward you financially. However, it's important to be aware of all the risks before you make your decision.
Understanding Buy or Lease Agreements
If the initial exploration shows your land is oil or gas rich, the discoverer may offer to buy the mineral rights. If it's not clear how much oil or gas is in the ground, the company is more likely to offer a lease agreement.
With a lease, you get a small down payment when you sign the agreement. If someone starts drilling commercially, you get monthly royalty payments based on the value of the oil or gas produced. Royalties typically run 12.5 percent, but skilled negotiators can get considerably more, perhaps twice that amount. .
Making a Decision
Selling your mineral rights instead of leasing has its advantages. A single lump-sum payment is a guaranteed payday for you, but royalties are a gamble: If your lessee goes out of business or the oil on your property is less than expected, your royalties may be small. If the well is a profitable one, however, royalties may bring in much more money than a sale.
If you decide to lease, you need to negotiate on the length of the lease, the size of your signing bonus and the amount of royalties you receive, among many other terms.
Being Aware of Safeguards
If you own the surface rights as well as the mineral rights, you need to protect your property against side effects of the drilling. Whether you lease or sell the rights, negotiate for guarantees that the company will repair damage to the land. That includes damage caused after the drilling stops – for example, if the land subsides because of the drilling – or pollution of the water supply. If you're living on the property, the agreement should set limits on drilling so that you can still enjoy your land.
Making Skilled Negotiations
Go over the lease with a fine-tooth comb, or hire someone with the knowledge to do it for you. A skilled negotiator who knows what a lease is worth can extract more money out of the would-be lessee. Don't be blinded by dollar signs.
If you use a well on the property for your water, for instance, it's worth taking less to get terms that protect your drinking water. If you absolutely cannot come to an agreement, say "no" and wait until someone makes you a better offer.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.