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The Royalty Clause In An Oil And Gas Lease

Monday, July 6th, 2015

Oil and gas leases give companies the right to drill for natural gas and oil on land owned by other parties. The owner of the land usually receives royalties from the oil and gas company that has the lease. There are three essential clauses in a typical oil and gas lease. To be valid, the lease must contain a royalty clause. The royalty clause spells out how much the landowner receives from production in exchange for giving the oil and gas company the right to drill on the land.

Essential Clauses In An Oil And Gas Lease

Although leases typically contain numerous provisions, there are three essential clauses in a typical oil and gas lease.

The granting clause is the statement that the landowner is leasing a particular piece of property to a named oil and gas company for the purpose of producing oil or gas. The granting clause conveys the right to develop and related rights to the lessee.

The habendum clause defines the type of interest and rights the landowner is granting to the company who wants to lease the land. This clause is where the length of the lease is specified. The primary term defines how long the lessee can hold the lease without producing gas or oil. The secondary term defines how long the lease will run after the gas or oil starts producing. The secondary term usually reads something like “so long thereafter as oil and gas is produced in paying quantities”.

The third essential clause is the royalty clause.

More About The Royalty Clause

The royalty clause defines how much money the landowner will receive, in addition to an initial bonus payment per acre. In Texas, leases on oil are usually compensated by a share in the oil produced at the well. Leases on natural gas is a share of the amount received for the sale of the gas. The landowner’s share is usually defined as the royalty percentage, also known as the royalty fraction. This share can be stated as a percentage (20%) or a fraction (1/5).

This clause also defines how much of the expenses are bore by the landowner. These expenses usually include the costs of operation and production. The landowner usually does not bear the expenses of initial well development.

The royalty clause also specifies how often royalties are paid to the landowner. This payment can be weekly, monthly, quarterly, or annually. This clause also indicates if it is paid by check, by direct deposit, or in another form. There may also be specifics on late fees and royalty minimums. The royalty clause is a distinct concept from the shut-in royalty clause, which allows a lessee to hold a lease by shutting in a well capable of producing hydrocarbons in paying quantities and making payment to the royalty owners.

Getting More Information On Royalty Clauses

Before you sign an oil and gas lease, you should have an experienced attorney look it over for you. Contact us here at Brown & Fortunato Give us a call at (806) 345-6300 or stop by our offices at 905 S. Fillmore, Suite 400 in Amarillo, Texas. You can also contact us via email. Check out our website to learn more about our other practice areas.

This information is subject to change. Please check for updates that are more recent than the published date of this article.