{ Banner Image }

Oil and Gas Leases

Click to Share Share  |  Twitter Facebook
Scott A. Storey
Foster Swift Agricultural Law Update
July 2011

The tumultuous world economic and political climate has had a profound effect on oil and gas exploration activities in Michigan. During the first six months of 2011, the State of Michigan issued 113 permits for new wells. Renewed interest in Trenton wells has generated much activity in Michigan’s Southern Trend over the last three years. Promising Dundee wells have been drilled in Mecosta and Osceola counties. Encana, the Canadian oil company that sparked a leasing boom in northern Michigan last summer, is scheduled to drill a second Collingwood test well in Kalkaska County in mid-July.

All of this activity increases the likelihood that an oil company, interested in drilling for oil and gas, will send a representative or "landman" to approach the landowner with the offer to lease the property for oil and gas development.

The lease offered by the oil company will typically grant the oil company the right to explore for oil and gas in exchange for financial compensation. Some of the important terms of the typical oil and gas lease include:

Cash Bonus.

An upfront payment, usually made on a per acre basis. This is a one time payment. However, a second cash bonus may be required to exercise an option to extend a lease.

Primary Term.

The duration of the lease if oil and gas are not produced. If a successful well is drilled within the primary term, most leases will continue to run for as long as oil and gas is produced from a well on the premises. Production from an oil and gas well could extend the term of a lease for decades.


Additional payments made to the landowner; typically a percentage of the net value realized from the sale of oil and gas.


The typical lease provides compensation for trees, crops, etc. damaged during the construction of a well site.


Most leases allow the oil and gas company to join leased acreage with neighboring land to form a larger "drilling unit". If one well is produced from a pooled unit, royalties will typically be distributed to landowners based on their proportional ownership within the unit.


When a well has ceased producing in economic quantities, the oil company is required by the State to plug the well with concrete. The lease can provide for completing the plugging below plow depth and for restoring the property to its pre-lease condition.

Non-Development Lease.

Since it is sometimes possible to extract oil and gas from wells located some distance away, some leases provide that the surface location of the well will not be on the leased premises.

Directional Well.

Wells can be drilled on an angle so that the surface location will not be directly over the point that the well penetrates a producing formation. It is possible for the surface location of a well to be as far as a mile away from the bottom hole location.

Governing Authority.

The spacing, drilling and production from oil and gas wells are regulated by the State. Spacing and drilling are regulated by the Department of Environmental Quality. Production from oil wells is also regulated by the DEQ. Production from gas wells and the pipelines necessary to transport gas to market are regulated by the Public Service Commission.

The terms and conditions of a lease are negotiable, even if the proposed lease is presented in a pre-printed form. The oil and gas lease is a unique and complicated contract. Therefore, it is wise to have a qualified attorney review the proposed lease and assist in negotiating revisions in its terms.