Landowner considerations before signing an oil and gas lease

Thanks to the Utica Shale, many landowners in Ohio are wondering about leasing their property to oil and gas companies. While the thought of oil makes many people see dollar signs, the truth is that often, the terms of the lease reduce profits significantly. The Stark County Farm Bureau explains that many factors go into negotiating a fair lease agreement.

Oil and gas companies typically want the language of the lease to contain very broad terms that give them almost unlimited access to the entire property. Surface owners are wise to identify possibly problematic clauses and negotiate for much narrower limits. Potentially detrimental words and phrases may include the following:

  • Farm wide
  • Other minerals
  • Any means
  • Transport across/through
  • Storage
  • Pipeline

Where the company can enter the property should also be carefully defined.

Some properties may be able to support multiple units, each with its own lease. The Ohio State Bar Association notes that when companies are using the hydraulic fracturing process, the size of the unit must typically be about 150 acres for each well. A landowner may want to set the limit to 640 acres with the option to offer more if the company does drill multiple wells.

When leasing property for fracking, water is an issue that must be addressed. For this technique, it is mixed with chemicals and other additives, stored on-site in pits and pumped into the ground at high pressures. The lease should require testing of the owner’s water supply, and if contamination occurs, potable water should be provided by the company.

It is common for companies to offer net revenue royalties with production costs deducted from those. However, it may not be fair for the owner to have to pay for expenses related to transporting, processing or marketing the minerals extracted. Any deductions from the owner’s royalties should be quantifiable and well-defined to ensure that they are fair.