Leases & Financing
Acquiring Leases
As an oil and gas prospect is being defined geologically, a landman works to stake out, in detail the land area whose mineral rights are necessary to drill the prospect. Preliminary lease checks are completed early in the process. These checks ensure that the necessary land is available for lease.
Lease negotiations will begin in earnest after the prospect generator has approved the project from a geological perspective.
Mineral rights leases can contain a myriad of terms. They will vary depending on geographical location and, like all binding contracts, will vary based on the land, land (surface rights) owner, and mineral owner circumstances as well as the local leasing "market". In "hot" areas, terms and compensation are more in the landowners favor. Common lease terms include:
Lease or Cash Bonus - The up-front per acre payment made to the mineral owner for signing the lease. The lease bonus is considered to be the first year's rent.
Delay Rental - Rental payments paid annually to the mineral owner after the first year of the primary term until the completed well is produced.
Primary Term - The initial period of time during which the lease will be in effect, in the absence of drilling, production, or other operations as specified in the lease. The primary term can be from one to 10 years or more.
Secondary Term - The term of the lease in which the lease is held in force after expiration of the primary term. Generally, shut-in payments, continuous drilling, and production operations are the only means to extend a lease into its secondary term.
Royalty - A percentage share of the production or equivalent cash value derived from the production, which is granted to the mineral owner in the lease. The royalty is free from the cost of drilling or production. Royalty rates vary depending on how prolific the area's hydrocarbon discoveries have been. They can be as small as an eighth to well over a quarter. The mineral owner owns the rights to the minerals in place under the ground. It can be, but is not always the landowner.
Shut-In Royalty - A payment made to the mineral owner in lieu of actual production. This occurs when a producing well is shut-in due to problems with the well that cannot be resolved within a period specified in the lease, an unattractive or suitable oil or gas market, a lack of facilities to produce the product, or other cases defined within the shut-in provisions contained in the lease.
Pooling - If a portion of the land required to drill a prospect is currently under lease, the landman will approach the party holding that lease to see if a pooling is possible. Pooling is simply combining adjoining tracts of leased land into a single unit. This would generally be done once the prospector has already secured the remaining leases necessary to drill the prospect.
After the leases have been secured, the prospect is nearly ready to be drilled. The royalty owner owns the rights to the minerals in place under the ground. It can be, but is not always, the landowner.
Permitting & Financing Wells
Permitting - All drilling permit applications generally include the lease and well numbers, county, legal description, location, field, proposed depth, type of well and other pertinent information. Approved permits-to-drill issued by each state and federal authority are effective on the same day they're approved by the regulatory agency.
Financing - Financing a well is a function of the prospect generator's access to capital and risk appetite. While some will drill wells they generate "heads up" or 100% self-financed, most will syndicate out a portion of the well to industry partners. Gulf Coast Midwest is a key industry partner for top tier independents in the U.S. Gulf Coast Region.
