Ohio’s Utica Shale has sparked a recent oil boom in our state, and with over 600 new wells drilled last year alone, it’s a good time to be a landowner. If you own land that could potentially be the site of an oil well, you can make a healthy income from leasing it to a drilling company. However, there are a few things you should keep in mind before you sign a lease.
Leasing your land gives drilling company right to test property. Although you’ve hopefully already realized this, leasing your land to an oil and gas company gives them the right to test your property through drilling and other methods. If you’re not comfortable with this, you shouldn’t sign the lease.
Work out a damage settlement. If you’re a farmer and you make a living off your land, you’ll want to make sure to include a damage settlement into your lease agreement in the event that drilling a well damages trees, crops, fences, or other valuable assets.
Look for a signing bonus. The oil company should give you an up-front lease payment (otherwise known as a signing bonus) in order to explore your land. Have your attorney look at the lease if the company is not offering you an up-front payment.
Work out a concrete time frame. Your lease needs to explicitly state how long your lessee has the right to explore your property, whether that’s a few months or a few years. If the lessee does not discover oil on your property within the time frame in the lease, then they will forfeit their rights and the lease will expire.
Decide whether or not to include “waiting on pipeline” clause. In some cases, the lessee may discover oil under your property but won’t have a way to transport it to market. If there is a “waiting on pipeline” clause in the lease they signed, then they can extend the lease.
Know that you’re entitled to royalties. If the lessee does find oil, then you should be entitled to royalties. It’s customary for the production company to pay at least 12.5%, but depending on the size of the well and the desirability of your property, you may be able to negotiate for a higher royalty payment. You can use this natural gas royalty calculator to come up with a fair estimate, but you should also talk with your lawyer.
Now that you know the basics of leasing your land to a drilling company, you may have a better sense of whether or not it’s a good choice for you. If you’ve already been approached by a drilling company, keep in mind that they’re the ones coming to you, and it’s fine to take your time negotiating for terms that work to your benefit. Carefully look over the lease with your Ohio business lawyer and make sure that you feel good about entering into this contract before you sign.