THE ‘LEASE-O-METER’

HOW TO GIVE YOUR OIL AND GAS LEASE A REPORT CARD AND DETERMINE IF THE LANDOWNER HAS A GOOD DEAL OR NOT

BY

LES. R. WRIGHT AND ROY T. OHNER[1]

Described below is a way for a landowner to ‘grade’ his/her oil and gas (especially a shale gas) Lease and give yourself a Report Card on that Lease. The Grading is anywhere from an A (fantastic Lease terms!) to an F (not so good Lease terms and a failure).

The below Report Card technique is described as a Lease-O-Meter – measuring your oil and gas lease to determine how friendly it is toward you, the landowner.

This Report Card is an easy and quick way to determine if the oil and gas lease you have (or are negotiating) contains terms beneficial to the landowner as compared to being more beneficial to the Oil Company.

Instructions for preparing the Report Card are as follows:

  • There are 53 Subject questions, categorized into Operating Subjects, Miscellaneous Subjects and Environmental Subjects (the categories are identified in Column A of the attached Report Card Table and Column B contains the subject questions).
  • Read each Subject question in Column B and then decide how it is best answered by Column C or Column E. Column C is generally the answer more favorable to the Oil Company. Column E is generally the answer more favorable to the landowner. Pick the most appropriate answer that applies to the specific terms of your Lease (and not what you would like it to be).
  • If the more correct answer is Column C then your score for that subject question is determined from Column D, which is ‘0’. If the more correct answer is Column E then your score for that subject question is determined from Column F, which is ‘1’. Place in Column G (Grade) the appropriate ‘0’ or ‘1’ score answer for each subject question.
  • Answer all 53 questions. There will be 53 entries in Column G (either a ‘0’ or a ‘1’ in each Column G box).
  • After answering all questions, add up all of the Column G scores and place the total answer at the bottom of Column G in the highlighted box next to the words: TOTAL REPORT CARD SCORE.
  • The highest and most perfect score is 53.
  • IF THE TOTAL REPORT CARD SCORE IS 48 TO 53, GIVE YOURSELF A LEASE REPORT CARD OF = A
  • IF THE TOTAL REPORT CARD SCORE IS 42 TO 47, GIVE YOURSELF A LEASE REPORT CARD OF = B
  • IF THE TOTAL REPORT CARD SCORE IS 35 TO 41, GIVE YOURSELF A LEASE REPORT CARD OF = C
  • IF THE TOTAL REPORT CARD SCORE IS 20 TO 34, GIVE YOURSELF A LEASE REPORT CARD OF = D
  • IF THE TOTAL REPORT CARD SCORE IS 0 TO 19, GIVE YOURSELF A LEASE REPORT CARD OF = F
  • If you get an A or B on your Report Card, then you can generally say that your Lease is fairly beneficial to you the landowner and contains terms and conditions generally to your favor.
  • If you get a C, then your Lease probably needs some amendments to make it more friendlier to you the landowner.
  • If you get a D or F, then you probably require major amendments to your Lease to bring it more in line with a more balanced and landowner friendly Lease. (In any event, an F is a failure and you are in need of some serious Lease redrafting. If you had a professional advisor assist with a D or F Lease, you probably should seriously consider seeking a new advisor…). And the next time you negotiate a new Lease or extend or amend an existing one, you may wish to use or consult the author’s Model Oil and Gas Lease form, as that form is designed to provide high Lease-O-Meter Report Card scores.

The authors refer the reader to other of the author’s papers on Leases if you require additional help in understanding the subject questions (or ask your professional Lease advisor. The author’s Model Oil and Gas Lease form and explanatory addendum, provides comprehensive description of the terms used in the Subject questions).

The authors recognize that this Lease-O-Meter Report Card, while simple to use, does have its flaws. Flaws in that some of the subject questions deal with terms contained in an Oil and Gas Lease some of which may be significantly more important than others. The authors accept that criticism, but in any event kept the same weighting for all answers. The user of the Lease-O-Meter can make their own adjustments if they believe certain questions should be given more weight and importance.

The authors in any event believe this first of its kind Lease-O-Meter (we are unaware of any other Lease Report Card type assessment) can be a useful and quick tool to assess early on if proposed Lease terms are to the landowner’s best interest and provide some early warning signs or red-flags of Lease terms to be wary of. Recall the Oil Companies objective is to obtain a Lease at the lowest cost, highest benefit to the Oil Company, and on terms most favorable to the Oil Company.

THE LEASE-O-METER LEASE REPORT CARD – HOW WELL DOES YOUR LEASE SCORE?

V.2 2012

[1] Authors of the following previously published reports freely available to the public…

1.UNDERSTANDING MODEL SHALE GAS LEASING PART 1;

2.UNDERSTANDING MODEL SHALE GAS LEASING PART 2;

3.MODEL SHALE GAS LEASE How to negotiate for royalty bonus rental payments Paper 3;

4.MODEL SHALE GAS LEASE FORM How cash bonus is determined Paper 4;

5.MODERN SHALE GAS LEASING How to negotiate for higher royalty Paper 5

6.MODEL SHALE GAS LEASE FORM ROYALTY OWNER VERSION 122011 Paper 6

7.MODEL SHALE GAS LEASE FORM ROYALTY OWNER VERSION 122011 - Explanation of terms Paper 7

8.HOW LARGE (AND HOW TO DETERMINE, WITH FORMS) THE ROYALTY RATE SHOULD LANDOWNERS RECEIVE FOR OIL AND GAS LEASES?

(ESPECIALLY SHALE GAS LEASES) Ten (10) Essential Questions and Answers Paper 8