Oil and gas leases are a unique form of contract and are the foundation of the oil and gas industry within Colorado and the United States. In the U.S., oil and gas is privately owned (as opposed to most of the rest of the world). However, most oil and gas owners are not able to risk the capital required to try and exploit their ownership and retrieve the oil and gas. The oil and gas lease was developed in response to this and its basic form has remained unchanged since the early days of the oil and gas industry.
The basic concept is that the oil and gas owner conveys the oil and gas rights to the company that wants to exploit the oil and gas for a set term of years, called the “primary term.” If the oil and gas company obtains production, the lease continues for as long thereafter as oil and gas is produced – the “secondary term.” Within that conveyance, the oil and gas owner reserves a cost-free interest in the oil and gas produced – the royalty interest. As a result, the oil and gas owner transfers the risk and cost of development to the oil and gas company and retains a risk-free royalty interest in production.
While the basics of the oil and gas lease have remained unchanged for many years, the law around oil and gas leases, and the various provisions that can be added to the basic oil and gas lease to protect both the owner of the oil and gas and the owner of the surface, are constantly evolving. Various provisions to evaluate include whether the oil and gas company will carry commercial general liability insurance, and its obligation to indemnify the property owner from claims that might arise from the oil and gas company’s activities. There are many other provisions oil and gas owners should consider prior to executing an oil and gas lease. If you have questions regarding an existing oil and gas lease, or have been approached about signing a new oil and gas lease, we recommend that you contact an experienced oil and gas attorney to assist in evaluating and negotiating the lease.