Does An Oil And Gas Lease Ever Really Expire?
May 1, 2017
When leasing gas and oil rights, it is essential that owners of these rights pay attention to the details in their contracts. This is especially important when considering contract expiration dates, since the details depend upon how the contract is written. Before selling oil rights, owners need to understand lease expirations in order to fully understand what to expect once they contract with a lessee.
Mineral Lease Terms
It is important to understand that when leasing gas and oil rights, the leases usually have two terms: primary and secondary. The primary term is the length of time specified in the lease document and for which the lessee pays money ahead of time. While this may seem simple enough, the primary term can frequently be extended into a secondary term based on when production actually begins. For this reason, anyone buying or selling oil rights needs to look at previous leases and whether have actually expired.
Ending Primary Lease Terms
The primary lease term has an ending date that applies if the land is not actually drilled or producing minerals for the lessee. If at this date nothing is being done on the land, the lease expires. This changes completely if the lessee is in the process of drilling whether producing gas and oil or not.
If there is active exploration or drilling going on that began prior to the primary term's expiration date, the lease is still considered to be in effect provided the company does not stop work for longer than 90 days. In other words, as long as a lessee engages in drilling even one day prior to the end of the contract, they are allowed to keep doing so to either produce minerals or determine a well is dry.
The lessee can drill as many holes as they wish, exploring beyond the lease expiration date, provided they continue to do so with the intent to produce. This automatic extension is said to be the secondary lease term.
What Happens With a Secondary Term?
When leasing gas and oil rights, when the secondary lease term goes into effect there certain things can happen. The drilling company can continue exploring the land until they begin to produce oil and gas, regardless of how long that takes as long as efforts do not lapse for greater than 90 days. If and when they are able to produce minerals, they are also permitted to continue doing so provided they do not cease production for longer than 60 days.
In the event that a well ceases to produce, the secondary term may still be in effect as long as the company makes efforts to re-drill the same well within 60 days. Once again, if they are able to produce oil and gas, the secondary term may remain in effect while production continues.
While this is only a very simplified explanation, it does illustrate the complexities involved in the leasing of gas and oil rights. Unless carefully negotiated in the lease contract, it may be impossible to determine when a lease expires if lessees have continued to explore and rework wells in accordance with these details. So it is essential that anyone leasing or selling oil rights work with an experienced professional who can interpret primary and secondary term expirations and negotiate appropriately in the owner’s best interest!
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