A difficult topic that many Ohio landowners are confronted with is their rights and obligations under an Oil and Gas Lease. An Oil and Gas Lease typically refers to a lease of the oil and gas located below an individual’s property. The following are a few questions that commonly arise on Ohio Oil and Gas leases.
Q. How do I know whether or not my property is subject to an Oil and Gas Lease?
A. The easiest way to determine if your property is subject to a Oil and Gas Lease is to obtain a title search for your property. Oil and Gas Leases can last for decades and typically cover large tracts of land. As time goes on and the large tract is divided into smaller tracts, so it can become confusing as to whether or not your parcel is subject to an Oil and Gas Lease. Therefore, it is important to have a professional conduct your title search and analyze the results.
Q. If my property is subject to an Oil and Gas Lease, do I have to let the Lessee enter my property?
A. Typically, yes. You should consult the Lease to see what your obligations are with respect to granting reasonable access to the Oil and Gas Lessee to drill a well or install a flowline on the premises.
Q. How long will the Oil and Gas Lease last?
A. This is a difficult question because the term of the Lease will depend upon the circumstances. Typically, an Oil and Gas Lease has two separate terms, a primary term and a secondary term. The primary term provides for a short duration of usually two to three years to allow the Lessee to explore and drill a well on the premises. However, if the Lessee is unable to drill a well within the primary term, it typically reserves the right to pay a delay rental payment to extend the primary term until a well is drilled. Thus, under the primary term, the Lessee can extend the term of the Lease for as long as it continues to make delay rental payments.
Once a well is drilled on the property, the secondary term comes into play and allows the Lessee to continue the lease of the premises for a longer duration of 10 to 30 years or as long as the well is producing oil or gas in paying quantities. If the existing well permanently ceases production, the Lessee is granted a reasonable time to drill another well on the property. If the Lease provides so, the Lessee can also reserve the right to temporarily cease production of the well and pay the Lessor a shut-in royalty to avoid termination of the secondary term. Therefore, determining whether or not an Oil and Gas Lease is still in effect on your property requires a fact intensive inquiry as to the circumstances associated with the well and the terms of your specific Oil and Gas Lease.
Additionally, Oil and Gas leases can be consolidated with an adjacent property’s lease. The production of oil and gas under any particular consolidated lease allows all of the consolidated leases to be treated as if oil and gas were being produced from their respective property. This allows the lessees to keep their lease in effect without having to drill a well on each leased property.
Q. An Oil and Gas Lease covers my property, but I do not understand why I am not receiving any royalties.
A. This could be due to several different problems. First, when you purchased your property, the Seller could have reserved the oil and gas rights or the right to all future royalty payments under an existing lease on your property. In this case, the royalty checks are likely going to the Seller. Second, the Oil and Gas Lease will typically require a Purchaser to provide notice to the Lessee of a change in ownership. If the Lessor fails to provide notice of change in ownership, the Lessee may continue sending checks to the old owner. Third, sometimes, the Lessor can be granted an advance royalty to be credited against future royalties. Therefore, even if you have a producing well, your or the prior owner’s receipt of advance royalties may prohibit your receipt of future royalties for a period of time.
Q. How much can I expect to receive from an Oil and Gas Lease?
A. The payments under the Lease will vary dramatically. If a producing well exists solely on the landowner’s lease, typically the Lessor is entitled to one-eighth of the gross income associated with the well. This in turn will depend upon the quality of the well and the production associated with it. If there is no well, you still may receive payments in the form of advance royalties, or delay rentals. You would need to consult your lease to determine your right to these types of payments.
Q. Am I entitled to free gas if I have a well on my property?
A. This will depend upon the terms of your specific Oil and Gas Lease. Typically, an Oil and Gas Lease will allow free gas to one house located on the leased premises where the well is drilled. The issue of free gas becomes more complicated when the original Lease parcel is fractionated into numerous parcels and future homes are built. A review of the lease and a title search will typically need to be conducted to determine who has the right to free gas on the leased premises.
Q. How close can an Oil and Gas well be drilled to my home?
A. The Ohio Administrative Code prohibits any well from being drilled nearer than 100 feet to any private dwelling house or public building.
Q. How many wells can be drilled on my property?
A. This will depend upon the amount of acres you own. The Ohio Administrative Code requires that a certain amount of acreage exist for a specific well. Typically, Oil and Gas wells in Ohio drilled to the Clinton formation are between 2,000 to 6,000 feet. A well between 2,000 and 3,999 feet requires a 20 acre tract while a well in excess of 4,000 feet requires a 40-acre tract.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.