Key Lease Clauses Every Mineral Owner Should Understand | Shale Magazine

A SHALE exclusive by guest writer Jonathan Hayes

At Mineral Rights Alliance, we believe in empowering mineral owners through education and advocacy. This guide explains the most important lease clauses every mineral owner should know.

Bonus Payments: What to Know Before You Sign

The lease bonus is often the first thing to catch a mineral owner’s attention. It’s the upfront payment you receive when you sign a lease, usually calculated per acre. While a bonus can be attractive, it’s only one part of the deal and not always the most important one.

A high bonus doesn’t necessarily mean a better deal. Some operators offer large bonuses but include terms that can hurt you later, such as low royalty rates or excessive deductions. Bonus amounts vary depending on location, competition for leases, and the production potential of your minerals.

Markets can shift quickly too. Renewed activity in your area might prompt operators to suddenly raise bonus offers to lock up acreage. A strong bonus may be tempting, but make sure you’re not giving up long-term value for short-term gain.

Royalty Rates: The Long-Term Value Behind the Lease

If the lease bonus is the immediate payday, the royalty is the long-term income stream. Your royalty rate represents the percentage of revenue you’ll earn from the oil and gas produced from your minerals.

While most leases offer royalty rates between 12.5 percent and 25 percent, the percentage alone doesn’t tell the full story. Even a one percent difference in royalty can amount to thousands, or even hundreds of thousands, of dollars over a well’s lifetime.

Many leases also deduct post production costs like transportation, compression, and processing from your royalty, which can significantly reduce your payments. To avoid these surprises, look for leases that use “cost free” or “gross proceeds” royalty language. These terms help ensure you receive your full share without unnecessary deductions.

Understanding the royalty clause fully is critical. It’s not just about the percentage but also how that royalty is calculated and what costs may be deducted.

Lease Term and the Habendum Clause: When Does Your Lease Expire?

The habendum clause is a vital part of your lease because it defines how long it remains in effect.  Every lease has two parts.

The primary term is typically a fixed number of years, often three to five, during which the operator must begin drilling.

The secondary term extends the lease as long as oil or gas is produced in paying quantities.

It’s important for mineral owners to watch for automatic extensions if an operator doesn’t drill during the primary term. Some leases include these and they may not benefit you. The phrase “produced in paying quantities” can be vague too. Operators might attempt to hold a lease with minimal production or shut in wells, so the lease should clearly define those circumstances. Many leases include a shut in royalty clause, allowing the operator to pay a small amount annually to keep the lease active when a well isn’t producing.

Confirm that this amount is reasonable and that the clause limits how long the lease can remain in that state. Keeping tight control over how long your lease stays active helps you avoid having your minerals tied up without benefit.

Pugh Clause and Depth Severance: Protecting Your Rights Below the Surface

One common mistake mineral owners make is assuming that once a well is drilled, the operator only leases the land directly around it. Without a Pugh clause or a depth severance clause, however, an operator could hold all of your acreage, even parts they’re not actively drilling.

A Pugh clause requires the operator to release unproduced acreage once the primary term ends, allowing you to re lease it.

Without these clauses, operators might hold your minerals indefinitely, even if they don’t plan to drill further. Including these terms gives you the opportunity to lease unused acreage to another company and potentially increase your income. These clauses are often negotiable and should not be overlooked just because they aren’t mentioned in the initial offer.

Though they may seem technical, a Pugh clause and depth severance clause can strongly affect your leasing flexibility and long term earnings.

Post Production Costs: The Hidden Fees That Eat Into Your Royalties

It’s all too common for mineral owners to receive a royalty check much smaller than they expected.

Often, this is because the lease allows the operator to deduct post production costs such as transportation, compression, dehydration and treatment, marketing, and administrative fees. Some operators deduct aggressively, while others do not. The difference lies entirely in the lease language.

To protect yourself, look for clauses stating that royalties are “free of cost” or are paid on the “gross proceeds” received at the point of sale. Avoid vague terminology like “market value at the wellhead,” which gives operators room to reduce your payments significantly. Understanding how post production cost deductions work is one of the most important parts of any lease negotiation.

Final Thoughts: Protect Yourself by Knowing the Clauses

Leasing your mineral rights can be an excellent way to create passive income, but only if the lease serves your interests. Do not assume the lease offered to you is standard or fair. Every clause matters, and understanding what each one means can save or earn you thousands over time.

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