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The Significance Of The Primary Term On Oil And Gas Leases

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Scott A. Storey
Foster Swift Agricultural Law Update
January 2012

Most oil and gas leases proposed by oil companies provide for long primary terms and options that can double the primary term of a lease.  The primary term is the initial period during which a well may be drilled.  If a successful well is drilled within the primary term, the lease will extend for as long as the well remains productive.  If a well is not drilled within the primary term, the lease will usually expire.  Scott Storey often counsels his landowner clients to negotiate for short primary terms and for little or no option to extend the lease.  This advice recently worked out well for two of Scott's clients. 

In one case, an oil company offered to lease a client's 160 acres for a five year primary term.  The proposed lease also contained an option to extend the lease an additional five years  upon payment of an additional $40 per acre.  Scott was able to assist the client in negotiating a primary term of three years with an option to extend the lease for two years.  An additional payment of $100 per acre would be required to exercise the option.  Recently, the client reported the receipt of $16,000 from the oil company which had elected to exercise its option so that it can drill a well on the property early next year. 

In the other case, a client was presented with a proposed lease with a primary term of seven years.  Scott was able to assist the client in getting the primary term reduced to two years.  Since the two year anniversary is fast approaching and the oil company will not be ready to drill its planned well until early 2012, he is now assisting the client in negotiations for a new one year lease which will result in another $100 per acre signing bonus for the client.