I have been proposed a lease that has a comment that I am concerned about. It proposes a 15% royalty but has a statement that if a well is drilled the paid up rental (I assume the paid up bonus) will be proportionally credited towards royalty payments based upon what year it is drilled after the lease is executed. Has anyone seen verbiage like this or is this typical? I would not think it is.
If you are paid 5000 an acre bonus(rental) for a 5 year lease and they drill the second year, my understanding is that remaining three years bonus(3000) will be subtracted from royalties. Even the second year, 1000 may be subtracted from royalties. Is this typical? Perhaps not. Surprising? Not in the least.
I have three Oil and Gas leases, two with XTO and one with Rex. Two of them were signed with in the last two years so they are modern "horizontal well" leases. None of the leases has any of the (up-front) bonus money applied to the royalties as the lease you are describing seems to do.
However, I suppose you can put almost anything you want in a lease as long as it is legal. Things are changing in the "oil patch" these days. Range as gone back to yearly "bonus" (that is not upfront) payments in recent lease offerings. That is the way it used to be. Under those conditions, they don't have to pay anymore bonus once the well work starts. Economically, that ends up being similar to what you have been offered.
I have never seen any language like this and I would not consider it to be typical. As we all know, with companies having less cash to front for lease bonuses now with the gas prices being so low, this is a way to possibly get back some of the bonus monies if they drill earlier in the lease term. Not necessarily a bad idea if you are trying to get a lease but as a landowner, you really need to weigh the benefit to you. It does act somewhat as an inducement for the company to try to act more quickly to drill the lease if they are able to recoup some of the lease bonus/rental monies so that may not be all bad.
It is an atypical arrangement but the economic effect would have been typical 7-8 years ago. They are giving you the bonus money for say years 1,2,3,4,5 all upfront. If they drill at the end of year 2 they want the bonus money for years 3,4,5 paid back. This is (about) the same as paying your bonus money yearly and then stop paying once work begins. This is better than what Range is offering in their new leases. With this atypical arrangement you have the money upfront. All leases have a clause that the Oil and Gas company can walk away at any time. Getting the money upfront protects you from abandonment or O&G bankruptcy. The arrangement sounds onerous but I think it is not as bad as it sounds.
I've not run across anything akin to this prior, and I don't like it. The idea of somehow "paying off" bonus money with royalties is alien, strange, and amiss. I received a very large bonus, and subsequent to that some great royalty money. But my royalties taken together have never come close to my bonus money.
It's pretty clear I don't understand, and have not experienced, such an arrangement as that described by the OP. But I feel fortunate to have leased when I did, some years back. With an arrangement like the one in the OP, I might never have leased at all. Why bother? If things are this bad the drilling companies should just fold their tents, go away for a while, and return when and if conditions improve.
NO payback, credit, or any other language used for the company to reap any benefit back for BONUS payment.!!
This is the first I've heard of this rip--off.
I believe this is similar to leases more commonly seen decades ago. Could be wrong here.
I think the way many oil and gas leases worked decades ago is there was a small up front sum paid to cover the first few days/weeks/months or the first year maybe. After that, the lease would have to be held by production/operations, or a delay rental would have to be paid by the Lessee to extend the lease as long as there was no production. Delay rentals could be paid monthly/quarterly/yearly, etc. The Lessee could continue to pay the delay rental to hold the lease until the end of the primary term. This is different than what most people see today, which are paid-up oil and gas leases, where the Lessee pays a large sum up front to keep the lease in effect for the entirety of the primary term, thereby eliminating the need to either pay a delay rental or commence production. They are essentially paying all delay rentals up front.
So, in your situation, it seems they are offering you all the money up front like a paid-up oil and gas lease, but saying it is like a delay rental up front, so they can recover whatever portion of the delay rental was unused (whatever portion of your "bonus" would have been paid after they begin production).
Could be totally wrong here, but I am pretty sure that's what is going on. Kind of what Philip Thackray is getting at.