What Is an Oil and Gas Lease?

If you’re a landowner or mineral rights holder, understanding how an oil and gas lease works is essential before signing any agreement. These leases allow energy companies to explore, drill, and extract oil or gas from beneath your land, often in exchange for royalty payments, bonuses, or lump-sum deals. For mineral owners, leasing can be a major financial opportunity. But without the right information, it can also lead to missed revenue, legal complications, or loss of control over your property.

In this guide, you’ll learn what an oil and gas lease is, how the process works, what key terms to look out for, and how to protect your rights and land value. Whether you’re exploring your first lease or looking to renegotiate better terms, this article breaks it down in plain language.

What Is an Oil and Gas Lease?

An oil and gas lease is a legal contract between a mineral owner and an energy company. It gives the company the right to explore, drill, and produce oil or natural gas from beneath a specific property. In return, the mineral owner earns royalty payments — typically a percentage of the revenue from the oil or gas that’s sold.

In simple terms:
You own the mineral rights. They do the drilling. You get paid.

But there’s more to it than just handing over access. A lease outlines exactly how the company can operate — and how you, the owner, are compensated and protected.

Key Components of an Oil and Gas Lease

A well-drafted lease covers multiple details to protect both parties:

• Royalty Rate
  The royalty is your share of the production revenue — often between 12.5% (1/8) and 25%, depending on the area and market. Higher rates are often negotiated in competitive regions.
• Lease Duration
  Most leases have two phases:
• The primary term (commonly 3–10 years), during which drilling must begin.
• The secondary term, which continues as long as production is ongoing.

• Surface Use Rights
  If you also own the surface, the lease may include terms for how and where the company can operate on your land — including building access roads, placing equipment, or installing pipelines.
• Additional Clauses
  Leases may also include terms for shut-in wells, pooling or unitization with nearby leases, and extensions or renewals. These can all impact your income and the lease’s long-term status.

Why Understanding Your Lease Matters

An oil and gas lease can provide significant long-term income but only if the terms are clear, fair, and in your favor.

Whether you’ve been approached by a company or are proactively looking to lease your minerals, knowing what’s in the contract — and what to negotiate — is essential. Poorly written leases can lead to:

• Reduced or delayed royalty payments
• Surface damage
• Long-term loss of control over your property

That’s why it’s smart to consult an oil and gas attorney or land professional before signing.

Types of Oil and Gas Leases Explained

When it comes to oil and gas leasing, there isn’t a one-size-fits-all approach. Different types of leases cater to specific needs and circumstances, each with its own implications for how the land and resources can be used.

Surface Lease 

This type of lease grants the energy company rights to use the surface of the property for activities related to exploration and production. This can include constructing access roads, setting up drilling rigs, and other infrastructure necessary for extracting oil or gas. It’s important for mineral owners to understand the extent of surface use allowed under this lease, as it can significantly impact the property’s surface.

Subsurface Lease

A subsurface lease focuses solely on the rights to the minerals beneath the property, without necessarily involving the surface. This means the company has the right to explore and extract resources from underground, but surface disruption may be minimized or even entirely avoided depending on the methods used. This type of lease can be particularly appealing to those who want to preserve the surface of their land while still capitalizing on the minerals below.

Right of First Refusal 

This provision isn’t a lease in itself but rather a clause that can be included in any lease. It gives the current lessee the first chance to renew the lease or match any offers that might be presented by other companies after the initial lease term expires. This can provide continuity and security for both the mineral owner and the lessee, ensuring that neither party is caught off guard when the lease term ends.

Gas Storage Lease 

A more specialized type of lease, the gas storage lease allows an energy company to store natural gas in depleted reservoirs beneath the property. This is often used as a way to manage supply and demand, especially during peak usage periods like winter. While this can create an additional revenue stream for mineral owners, it also requires careful consideration of how storage might affect the land and any ongoing or future production activities.

How Oil and Gas Leases Work

Once an oil and gas lease is signed, the energy company (called the lessee) receives the legal right to explore for, drill, and potentially produce oil or natural gas from beneath the land. This process unfolds in several key stages, each with financial and legal implications for both the company and the mineral owner.

Step 1: Geological Evaluation and Seismic Surveys

The first step is to assess the potential for oil and gas beneath the surface. Companies often begin with geological studies and seismic surveys, which use controlled sound waves to map underground rock formations.

This phase helps determine:

• Whether the site is likely to hold oil or gas
• Where to position drilling rigs for the best chance of success
• Whether the lease is worth advancing into the drilling stage

These surveys are non-invasive, but still require surface access. If the area shows promise, the company moves forward.

Step 2: Drilling Operations

Next comes drilling, which may involve vertical wells, horizontal drilling, or directional drilling (used to access deposits from an angle or minimize surface impact).

Drilling includes:

• Setting up rigs and infrastructure (roads, tanks, pipelines)
• Drilling into targeted rock formations — often shale or sandstone
• Testing the well to determine if the hydrocarbons found are in commercial quantities

If the well does not produce at economic levels, the company may abandon it and restore the surface. If it’s a productive well, operations move to production.

Step 3: Production Phase

When hydrocarbons (oil or gas) are successfully extracted, the lease enters the production phase, also called the secondary term. At this point:

• The company sells the oil or gas to refineries or utility markets
• Royalty payments begin for the mineral owner — typically monthly or quarterly
• Surface use terms come into play (access roads, land restoration, etc.)

The lease remains active as long as production continues in paying quantities.

Additional Considerations

• Shut-in Clause: If a well is capable of producing but temporarily paused (e.g. due to low prices or infrastructure delays), the lease may remain active under a shut-in clause — often with a small payment to the mineral owner.
• Pooling and Unitization: In some states, multiple leases can be “pooled” together into a larger unit for more efficient drilling. This may affect how royalties are shared across mineral owners.
• State & Federal Oversight: Depending on the location, leases may be governed by local regulations, or involve state or federal agencies if public lands are involved.

An oil and gas lease gives companies the legal path to explore and develop underground energy resources — but the process doesn’t happen overnight. From seismic mapping to drilling and finally production, each step is guided by the terms of the lease. For mineral owners, understanding how this timeline works is essential to protect your land and ensure fair compensation as operations move forward.

Key Considerations for Mineral Owners

Before signing an oil and gas lease, mineral owners should carefully evaluate the terms of the agreement. These leases can be highly profitable, but they also involve long-term legal and financial commitments. Here are the key elements every mineral owner should understand and negotiate:

Royalty Rates

The royalty rate determines how much money you make when oil or gas is produced from your minerals. It’s the percentage of the revenue you’ll receive from the sale of those resources.

Traditionally, many leases have offered a 12.5% (or 1/8) royalty, but in today’s market, it’s common and often reasonable to negotiate a higher rate. In competitive regions, rates of 18% to 25% are not unusual.

Even a small increase in the royalty rate can mean thousands of dollars over time. Make sure the lease clearly states how royalties are calculated, and whether any deductions (like processing or transportation costs) will be taken from your share.

Surface Use Provisions

Even though the lease is for subsurface minerals, oil and gas operations often impact the land above your surface property. That’s why it’s important to include detailed surface use provisions in your lease.

These provisions define where and how the company can build roads, install pipelines, place drilling rigs, or access water on your property. You can:

• Limit operations to certain parts of your land
• Require notification before any activity begins
• Request land restoration or damage payments after operations end

A well-written surface agreement helps protect the value and usability of your land for agriculture, housing, or future development.

Lease Duration and Term Limits

Oil and gas leases typically include two time periods:

• Primary Term: A fixed period (usually 3 to 10 years) when the company must start drilling or the lease expires.
• Secondary Term: If production begins during the primary term, the lease continues as long as oil or gas is produced in paying quantities.

You should try to negotiate a shorter primary term if possible, especially if the company has no clear drilling timeline. This gives you more control over your minerals if they don’t act quickly.

Also, ask for clear definitions of when the secondary term ends — such as after a period of non-production — to prevent the lease from staying active indefinitely.

Environmental Protections

Drilling and production can affect the environment — and your land. Leases should include specific environmental protection clauses to prevent damage and ensure cleanup.

You can ask for:

• Spill prevention and response plans
• Land and water restoration requirements
• Limits on chemical use (especially during hydraulic fracturing)
• Noise and light control, especially near homes or sensitive areas

These terms are especially important if you rely on your land for farming, water wells, or live in close proximity to drilling locations. Environmental damage can be costly and long-lasting — the lease should help protect against it.

How to Negotiate an Oil and Gas Lease

Negotiating an oil and gas lease is one of the most important steps a mineral owner can take to ensure they are receiving fair compensation and protecting the value of their land. Every lease is a legal contract — and most of its terms are negotiable. Understanding what you can ask for before signing can make a significant difference in your long-term financial return and land use rights.

Here are the most critical components to review and negotiate:

1. Royalty Rate

The royalty rate determines the percentage of revenue you will receive from the production of oil or gas. While 12.5% (or 1/8) has long been considered a standard, many mineral owners in competitive markets successfully negotiate higher rates — typically between 18% and 25%, depending on the location and demand. Higher royalty rates mean greater long-term income, especially in productive basins.

2. Lease Duration

Oil and gas leases are typically structured with a primary term and a secondary term. The primary term is the initial period (commonly 3 to 5 years) during which the company must begin drilling. If they do not, the lease usually expires unless it’s a paid-up lease or includes a shut-in clause. Shorter primary terms are often more favorable for landowners, as they retain the ability to renegotiate or lease to another company sooner if drilling does not occur.

3. Surface Use Provisions

If the lessee is also granted access to the surface of your land, be sure to negotiate how and where they can conduct operations. A well-drafted lease can specify:

• Where roads or drilling pads can be placed
• Limits on the use of water or other resources
• Reclamation responsibilities after drilling is complete

Surface damage payments, fencing requirements, and livestock protections are also commonly negotiated in surface use agreements.

4. Bonus Payments

A lease bonus is a one-time payment made upon signing the lease. Bonus rates vary significantly based on location, market conditions, and competition for leases. In some active regions, bonuses may range from a few hundred to several thousand dollars per acre. Always compare offers and request transparency about how the bonus is calculated.

5. Shut-In Royalty Clauses

A shut-in clause allows the lessee to maintain the lease even when a well is not producing, often for a nominal annual payment. While this is a common industry practice, landowners should ensure that the clause includes a time limit (such as 1 or 2 years) and a reasonable shut-in payment. Otherwise, your lease could remain active indefinitely without actual production or fair compensation.

6. Pugh Clauses (Optional but Important)

If your property is part of a larger pooled unit, a Pugh clause can help ensure that only the portion of your land that is being actively drilled remains leased. This prevents the energy company from holding your entire property based on minimal production in one area.

Tip: Always consult a qualified oil and gas attorney or land professional before signing any lease. A seemingly small clause can affect your income, property rights, or legal obligations for decades.

Potential Drawbacks of Oil and Gas Leasing

While oil and gas leasing can offer substantial financial rewards, it’s not always the right choice for every mineral owner. The industrial nature of exploration and production activities can sometimes clash with other land uses, especially in residential or agricultural areas. For instance, the noise, traffic, and environmental disruption associated with drilling can affect the quality of life for those living nearby and may impact the usability and value of farmland.

Moreover, environmental concerns are a significant factor to consider. Techniques like hydraulic fracturing (fracking) and drilling may pose risks to water quality, air quality, and the overall ecosystem, particularly if not managed properly. The potential for spills, soil contamination, and habitat disruption can have long-term consequences for the land. Mineral owners should weigh these risks carefully against the potential financial benefits, considering both the immediate and future impacts on their property.

Impact of Regulatory Changes

The regulatory landscape surrounding oil and gas leasing is dynamic and subject to change, often influenced by shifts in political leadership and public policy priorities. For instance, recent years have seen fluctuations in royalty rates, with some administrations pushing for higher rates to increase public revenue from natural resource extraction. Stricter environmental regulations have also been introduced, aiming to mitigate the impact of drilling and production activities on the environment.

These changes can directly affect the profitability and feasibility of new leases, making it essential for both mineral owners and lessees to stay informed. Higher royalty rates may reduce the net income from a lease, while more stringent environmental rules could increase the cost of compliance for energy companies, potentially making some projects less viable. Staying updated on these regulatory shifts and understanding how they might impact lease agreements is crucial for navigating the complexities of oil and gas leasing effectively.

Oil and gas leasing is a powerful tool that bridges the gap between mineral owners and energy companies, enabling the extraction of vital resources while offering financial benefits to those who hold mineral rights. However, it’s a process fraught with complexities and potential pitfalls. Whether you’re a mineral owner looking to capitalize on your assets or an energy company seeking to expand your operations, understanding the details of these leases—from the types of agreements available to the potential risks and regulatory challenges—is essential.

By thoroughly evaluating key aspects like royalty rates, and surface use provisions both parties can ensure that they enter into agreements that are not only profitable but also sustainable and fair. As you navigate the intricate landscape of oil and gas leasing, knowledge is your greatest asset, empowering you to make decisions that align with your goals and protect your interests in the long term.