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How long should the primary term of an oil and gas lease last?

On Behalf of | Jun 6, 2024 | Oil And Gas |

Real estate isn’t just valuable as a passive investment or a source of income. It can also be a way to secure ongoing revenue for a household. For property owners in Texas, natural resources can significantly alter the value of their property. Texas is famous for having abundant oil and gas reserves that can generate regular revenue for property owners in the form of an oil and gas lease. Arranging a lease with an outside party does not automatically lead to drilling activity, but it protects the other party’s right to access and utilize the resources at the property.

Typically, an oil and gas lease includes a primary term during which the leasing party does not need to take any additional actions to use the lease. There may also be an option term during which the property owner may agree to renegotiate arrangements or extend the lease with the other party.  The secondary term begins at the end of the primary term or extension when there is actual production from the leased premises or lands pooled with the leased premises.

Different leases have different terms

There are two main categories of oil and gas leases, and different standards apply depending on the circumstances. Many oil and gas leases involve private businesses. Oil and gas companies often desire at least a three-year primary term (and often request a five-year primary term) when signing a lease with the property owner. However, the primary term of some leases may last for longer when there is strong competition for local resources or a history of successful drilling at a particular property.

In Texas, the State often owns the minerals under streams, rivers, and highways, as well as occasionally under actual tracts of land.  The Texas General Land Office oversees some 13 million acres of land and mineral rights on behalf of the Permanent School Fund.  The School Land Board and General Land Office accept sealed bids for leases on those lands;  The General Land Office negotiates the leases.

The other main type of oil and gas leases involves reaching an agreement with the federal government. The Bureau of Land Management (BLM) has the option of signing competitive oil and gas leases for properties in Texas and elsewhere. Typically, federal oil and gas leases have a 10-year primary term.

The terms of an oil and gas lease can include protections for the surface and should be carefully negotiated.  Seeking an attorney well versed in oil and gas is essential to protect your plans for your real estate.

The duration of an oil and gas lease can also factor into other plans made by an individual, including estate planning efforts or a decision to sell their real property. Carefully reviewing oil and gas leases to determine the duration of an arrangement is crucial for the protection of property owners and the investments they’ve made in their Texas real estate holdings.

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