Commonly Used Oil & Gas Lease Term Definitions
Absolute Ownership – A type of real property ownership; when owners have the most rights, least limitations and are indefeasible. With regard to oil & gas, this is the theory that minerals are fully owned before extraction and possession. Titles to oil and gas may be lost due to legitimate drainage, or in case of eminent domain.
Abstract Company – A privately owned company who is in the business of compiling real estate and legal histories, such as preparing abstracts of title.
Acreage Contribution – A support agreement in which a party agrees to grant leases or interest in leases in the area of a test well to another party, and contributed to the driller of the well in return for information obtained by drilling.
Adverse Possession – The process of asserting and gaining a property title against other claimants, including the owner. The exact elements of a claim may differ from state to state.
Assignment Clause – A clause in any legal agreement that allows either party involved to assign all parts of their interests to others.
Authority for Expenditure – An estimate of costs prepared by a lease operator and provided to any partners or parties involved for approval prior to drilling. Failure to approve may result in delay or cancellation of the proposed project.
Bonus Consideration – A cash incentive given by the lessee for the extraction of an oil and gas lease by the mineral owner. The incentive is usually given in dollars per acre.
Damage Clause – A clause in which it is stated who is liable for surface damages, in most cases it is the operator or lessee.
Habendum Clause – A clause in a deed or a lease which fixes the duration of the lessee’s interest in primary and secondary terms. Also referred to as a term clause.
Joint Operating Agreement – A contract or legal agreement in which two or more co-owners of the operating rights of a tract of land agree to share the costs of exploration and development.
Joint Venture – A business agreement in which all parties involved agree to share control, profit, losses and liability.
Lease – A legal document between a landholder (lessor) and a business or individual (lessee) that grants the rights to use the premises for the use of extracting minerals. It is also the area where the equipment such as production wells, stock tanks, separators, etc. are located.
Lease Purchase Agreement – An agreement between companies in which one company agrees to purchase another’s interest in leases.
Mineral Owner – The owner and controller of all rights and interests under a tract of land, with the right to execute leasing on the land.
Net Revenue Interest – The revenue from oil and gas production after all operating and development costs are paid.
Offset Well – A well that is drilled on the next location to the original well. Also, a well drilled to prevent oil and gas from draining from one tract of land to another where a well is being drilled or is already producing.
Oil Payment – A non-operating interest oil and gas leases, providing the owner with a share of oil and gas minus production costs. The payment terminates when a specified agreed-upon dollar amount or production volume occurs.
Paid-up Lease – A n oil and gas lease that is paid in advance for the entire primary term.
Pooling Clause – A clause that allows the lessee to combine leased property with other property.
Primary Term – The amount of time that a lease agreement will be in effect. Usually ranges from 3 to 10 years.
Production Payment – A share of the production value or proceeds, free of the costs of production, that terminates when an agreed-upon sum has been paid.
Royalty – The percentage of mineral production paid to the lessor based on gross production free of all costs except taxes.
Royalty Clause – The clause that establishes the production percentage paid to the lessor.
Secondary Term – An automatic extension of the primary term lease as long as the well is deemed capable of producing gas.
Shut-in Royalty – A payment made to a landowner when a well is capable of production but is shut down for some period of time.
Warranty of Title – A common feature in most lease forms in which the landowner agrees to defend the title to the mineral rights should a dispute arise concerning ownership.