Business-Minded Legal Solutions

Determining the value of oil and gas leases

The Texas energy industry has a rich and colorful past, with wildcat rigs out searching for oil and gas in the first half of the 20th century. Fortunes were made in the old days by gambling if there was oil or gas and how much. Technology has refined exploration strategies, but the fact remains that energy companies have to go where the oil and gas are. This means that landowners can sell the land outright or exploration and production leases for mineral rights to the companies whether they drill or not.

Today, leases can include upstream agreements for the land and royalties based on production numbers. There are also related midstream agreements for related uses like infrastructure or pipelines. There may be agreements with investors, ranchers, farmers, or other stakeholders.

The variables involved in a lease

Generally speaking, gas and oil rights leases will last a set amount of time (4-6 years is common in Texas). The mineral rights lessor will receive payment regardless of whether the company drills. There may also be monthly royalties or other arrangements.

The type of land leased will also help determine the value of the agreement – drilling will impact the land and its future value. High-yield or high-value parcels will be worth much more in royalties.

Renewing the contract

Landowners will often lease land for decades, sometimes without a leaseholder drilling. Non-producing land will typically have little value to companies ($0 to $250 per acre), while established producers will be worth much, much more. Renewing the contract is a numbers game where the landowner uses monthly royalties and multiples them by the number of months the contract lasts.

Making a decision

Landowners will often receive unsolicited offers before they make a decision. They may also reach out to someone recommended by a friend. Regardless, the bids will widely vary. Such variables as potential income, the taxes on that income, the duration, and possible future uses of the land can make it hard to recognize good offers from bad ones.

Working with an attorney who handles mineral rights agreements can minimize the guesswork. They understand the industry, its long-term ecological impact on the land and how to construct a fair and equitable deal.