Entering a mineral lease means entering a long-term relationship. If drilling is successful leases will remain in effect for as long as minerals are still being produced on the land. This means a lease can (and often does) continue for generations. Even if drilling is unsuccessful leases will generally last for several years.
Further, the relationship between the landowner (the “Lessor”) and the energy company (the “Lessee”) is inherently prone to conflict. While both parties want the lease to be successfully developed and produce revenue, many of the parties’ specific goals will differ. For example, because it is footing the bill, the energy company will want the lease developed as economically as possible. Conversely, the landowner simply wants the lease to produce revenue. Similarly, after initial exploration, the energy company may feel that its resources are better invested in development of other locations. In this case, the company will seek to hold the landowner’s lease with a minimum of wells and development. While this may be the most efficient course of action for the company, it is not advantageous to the landowner. When it comes to how the lease is developed the roles are reversed. The landowner cares greatly about how development effects the surface of the land, whereas the energy company has no vested interest.
It is also important to note that once a mineral lease is entered it is not easy to get out of. There are a variety of reasons landowners seek to terminate a mineral lease. Perhaps acreage values in the area have risen, and the land has become more valuable since the lease was executed. Or a landowner may feel that the lease is not being developed quickly enough. Maybe the landowner is comfortable with the pace of development, but not happy with the manner in which the acreage is being developed. Generally speaking, unless negotiated in advance, none of these are sufficient reasons to terminate a lease.
Entering a mineral lease can be a great benefit for both the Lessor and the Lessee. Energy development can provide both parties with years of income. However, there are a number of issues that need to be addressed before the lease is signed. Even if both parties have the best of intentions it is foolish to blindly enter a lease. Fortunately, people have been leasing land in the Rocky Mountains for over 100 years and the law in this area is well developed. Because of this it is realistic to address most potential pitfalls prior to signing a lease.
In the coming months this blog will address topics related to oil and gas leasing in the Rocky Mountain States of Colorado, Montana, New Mexico, North Dakota, Utah, and Wyoming. The articles contained herein are intended to provide information only. The publication of this blog will not create an attorney-client relationship. Nor can the posting be considered “advice” as every situation needs to be evaluated according to its own facts. Anyone entering a lease should hire a qualified attorney for representation.
Future post: Commencing Drilling Operations – In most leases, energy companies will be obligated to commence drilling operations within a certain period of time. What does it mean to “commence drilling operations” from a legal perspective?