A plain-English guide to understanding the key terms in your oil and gas lease. Know what you're signing and what it means for your mineral rights.
An oil and gas lease is a contract between a mineral owner (lessor) and an oil company (lessee). You grant the company the right to explore and produce oil and gas from your minerals. In return, you receive compensation through bonus payments and royalties.
The lease doesn't transfer ownership of your minerals—you still own them. It grants specific rights to develop them for a defined period.
Key Point: Lease terms significantly affect both immediate value (bonus) and long-term value (royalties, duration, post-production costs). Understanding these terms helps you make better decisions.
What it is: An upfront cash payment made when you sign the lease
How it's calculated: Usually quoted as dollars per net mineral acre (e.g., $500/acre)
Example: 40 net mineral acres × $500/acre = $20,000 bonus
What it is: Your percentage of production revenue, paid monthly when the well produces
Common rates: 1/8 (12.5%), 3/16 (18.75%), 1/5 (20%), 1/4 (25%)
What affects it: Location, basin activity, competition among operators
What it is: Annual payment to keep the lease active without drilling
When paid: If no well is drilled during the primary term
Note: Many modern leases are "paid up"—meaning bonus includes delay rentals
The initial lease period (usually 3-5 years) during which the operator must begin drilling or the lease expires. Shorter primary terms are generally better for mineral owners.
The period after the primary term where the lease continues "for so long thereafter as oil or gas is produced." This can extend the lease indefinitely while production continues.
Once a well produces in "paying quantities," the lease extends beyond the primary term. Your minerals remain leased as long as production continues—even if minimal.
Some leases allow the operator to extend the primary term by paying additional money, even without drilling. Review any extension provisions carefully.
Pooling/Unitization Clause: Allows the operator to combine your minerals with adjacent tracts to form a drilling unit. Standard in most leases, but the size limits matter—larger units mean smaller royalty checks per well.
Operations Clause: Defines what activities (drilling, reworking, etc.) keep the lease in force. Important for understanding what "drilling operations" means.
Shut-In Clause: Allows the lease to continue even when a well is shut-in (not producing) by paying a shut-in royalty. Protects the operator when wells aren't economical to produce.
Continuous Development Clause: Requires ongoing drilling activity to hold all acreage. Without this, one well can hold an entire lease indefinitely.
One of the most important (and often overlooked) lease provisions deals with who pays for costs after the oil/gas leaves the wellhead:
You receive royalty on gross proceeds with no deductions for gathering, processing, transportation, or marketing costs. Most favorable for mineral owners.
Operator can deduct post-production costs from your royalty. These deductions (gathering, processing, transport) can significantly reduce your check.
Impact example: On a gas well, post-production costs might total 30-40% of the sale price. A $1,000 gross royalty could become $600-700 after deductions under a "market value at the well" lease.
Depth severance: Does the lease cover all depths, or can you lease deep rights separately?
Pugh clause: Releases unleased portions of your minerals if not included in a producing unit
Surface use: What rights does the operator have to use your surface land (if you own it)?
Assignment: Can the operator transfer the lease to another company without your consent?
Force majeure: Excuses operator from lease obligations during unforeseen events—how broadly is this defined?
Proportionate reduction: If you own less than 100% of the minerals, your bonus and royalties are reduced proportionately
If you're considering selling your mineral rights, your lease status affects value:
Lease terms transfer to buyer
Favorable lease = higher value
Already receiving royalty payments
Buyer inherits lease negotiation rights
Value depends on area development
May receive bonus at future lease
We evaluate minerals regardless of lease status. Leased and unleased minerals both have value—it just depends on different factors.
Whether your minerals are leased or not, we can help you understand their value. Get a free, no-obligation evaluation.
Get Your Free EvaluationOr call us at (404) 604-6364