Oil and gas attorney survey indicates positive financial results from lease bonus negotiations

This is the first in a series of articles that discusses the results of a follow-up survey that measures negotiated alterations to the terms of an oil and gas lease by oil and gas attorneys for their clients.

For the past three years, property owners in many areas across the state have been approached by oil and gas company land men with an offer to lease their oil and gas mineral rights.

For many mineral owners, this may be their first exposure to an oil and gas lease contract. Landowners who have never dealt with leasing their mineral rights for oil and gas production, upon reading a lease, may have found that they had difficulty understanding the lease language. Many landowners have reached out to obtain assistance in understanding this rather complex issue.

In areas of potential mineral extraction activity, a group of Michigan State University Extension educators, led by me, initiated an educational program that provided news articles, a quarterly landowner newsletter, written bulletins, webinars, public educational meetings and other materials. These resources provide information that would assist mineral owners in learning how the terms of the standard lease affect their businesses and their options in negotiating changes to the lease that put the agreement in line with their financial and environmental goals.

Because of the complexities of the oil and gas lease contract and its potential long-term life, MSU Extension recommended that a knowledgeable oil and gas attorney with experience working for private landowners be consulted to assist in negotiation of the oil and gas lease. “Oil and Gas Expert Resources for Private Landowners”, which included a list of oil and gas attorneys, along with other educational documents have been provided as a free downloadable resource.

To begin the process of evaluating the financial impacts of this education, during the summer of 2013 a survey was mailed to oil and gas attorneys. The survey measured oil and gas lease terms “before negotiations” and “after negotiations” to determine what, if any financial or environmentally related lease terms were negotiated to benefit their clients.

Oil and gas lease bonus payment

The survey results indicated that each attorney represented an average of 8,018 acres of cropland each year. The first survey question dealt with the lease bonus. The bonus is a cash payment, usually in dollars per acre that is paid to the mineral owner after the lease is signed. The survey compared “the average initial bonus payment per acre offered” to the “bonus paid due to lease negotiations.” The average initial bonus offer was $42 per acre. Lease negotiations increased the average bonus paid to $124 per acre, an increase of $82 per acre, or 195 percent. These nine attorneys, representing 8,018 acres each per year represented a total of 72,166 acres per year. At an increase of $82 per acre, they earned $5,917,612 per year in additional gross income for their combined landowner clients. Determining fees charged to the client were not within the scope of this study. In his video “How Much Will it cost to Hire an Attorney to Negotiate an Oil and Gas Lease?” Kevin McDugle indicates that the average lease should cost no more than $1,000 in attorney fees.

This article is the first in a series to discuss the results of this survey. Future articles include:

  • Royalty negotiation results
  • Post production costs negotiation results
  • When negotiations were not successful, what did the landowner do?
  • Environmental and land use negotiation results

Related Articles