What Is The History Of The Oil and Gas Lease?
June 22, 2016
Texas is a state that is rich with many natural resources in the land. This can be very valuable to landowners with mineral rights who extract these resources. Landowners can also sell their mineral rights and earn royalties, letting someone else extract the resources. With the ability to sell their mineral rights, landowners can easily and conveniently earn income from their land through gas and oil leases without having to do the work themselves. Gas and oil leases have been around for a long time and is the main way for energy companies to extract gas and oil from privately owned property.
The First Commercial Oil Well
Although there were already privately owned oil wells extracting minerals from the ground in many areas, the first commercial oil well drilled on leased ground was built in 1859 near Titusville, Pennsylvania. Edwin Drake built his well on land owned by a farmer. He offered the farmer a portion of any minerals extracted from the well as royalties, in exchange for a 15-year lease of the land and the ability to extract any minerals found. That well only produced a small amount of oil, not enough to make it profitable, and was shut down only three years later.
Leasing Land for Mineral Extraction
Despite the fact that Drake’s oil well was not profitable and was shut down long before the 15-year land lease expired, it set an example for other such leases to follow because of its unique lease arrangement. The lease contract was taken from the salt mining industry and modified with terms appropriate for a land lease of other minerals. It promised royalties in exchange for the ability to explore and extract minerals from the land, paving the way for more oil wells and property leases.
Shortly after Drake’s oil well was shut down and more people were beginning to use his amended document to lease land for oil drilling, the Pennsylvania Supreme Court heard a case disputing oil rights. In 1862, a well that had been dug under a salt mining lease struck oil and brine, leaving the lessee questioning who the oil belonged to since the land lease was for brine, not oil. Based on the terms of the land lease and the fact that extracting the brine would require separation from the oil, the court decided that the oil also belonged to the lessee. This decision supported the idea that a lessee of the land who is paying the landowner royalties is entitled to any minerals discovered unless specifically noted otherwise.
Modern Oil and Gas Leases
The first printed oil and gas lease forms appeared in 1870 and were published by J.A. Heydrick of Oil City, Pennsylvania. His forms became the standard oil and gas lease paperwork that is still in use today. Although there have been numerous legal disputes over the years about the interpretation of oil and gas lease contracts, the basic laws that apply today still follow Heydrick’s lease form and the implications outlined within it. Modern oil and gas leases regarding the sale of mineral rights assume the lessee has title to the land below the surface during the term of the lease, while the landowner retains title to the surface and receives a royalty for the minerals harvested. Royalties are paid in cash as opposed to a portion of the yield from the ground; however, everything else remains mostly the same.
Leasing mineral rights from privately owned land is a practice that has been in place since the 1800’s, providing income for landowners as well as oil and gas to lessees. Although the calculations used to determine the royalties paid are somewhat complicated, the lease of the land itself is very straightforward. If you are a landowner and wish to sell your mineral rights, talk to an experienced royalties company today to learn more!
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