A Basic Guide to Reading an Oil Lease Document

Quite a few people have been confused as to what an oil lease is defined as. Some fairly large oil and gas firms like Sentry Energy Production LLC have actually taken it upon themselves to define the term right on their website. Those who are interested in investing in oil companies or working with them should take the opportunity to read up on this otherwise arcane topic.

How an Oil Lease Works

These documents are basically an agreement to allow a Lessee to have access to minerals on the Lessor’s property. The Lessee is generally an oil and gas company along with their production crews. The oil lease agreement is a legal contract that contains certain elements to confirm all terms of the agreement.

The lease always has to be dated, and the lease also has to set a time that the lease is effective until. There might be a renewal clause coupled with that date. It will also have to have a separate section that reiterates the names of every party that’s bound to the lease agreement.

The Consideration Section

Those who are used to reading lease agreements may not be familiar with the consideration section of oil company documents. This section of the lease describes the legal terms and ensures that the lease will be legally enforceable by everyone involved.

Individuals leasing an apartment or a motor vehicle don’t usually have to worry about having these terms spelled out so clearly, but the sensitive nature of oil and gas exploration require additional legal verbiage to explain what happens if there were a dispute. It’s important to pay close attention to this line in case there were problems in the future.

The Royalty Clause

Landowners often pay a great deal of attention to the royalty clause. This clause has to explicitly state just how much the Lessor is going to receive. This figure is generally expressed as a percentage or share of the proceeds of the production of oil and gas that the Lessee will make once they sell their product.

Some documents will carry an additional rental clause that allows an energy company to defer immediate use of the land. This is generally only allowed if the company in question pays some kind of delay rental fee and completes their obligation within a certain period of time.

A few documents might conclude this section with a pooling clause. This sort of statement allows the Lessee to combine a number of leases together in order to form a single larger production unit. These statements are generally only given out when working with multiple plots of land that are physically near each other, but this isn’t a requirement.

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