OIL AND GAS LEASING OF AGRICULTURAL LANDS
Introduction
Oil and Gas are hydrocarbons commonly referred to as petroleum. Petroleum is a highly
valuable commodity. It may be liquid or gas, depending on the circumstances. Liquid petroleum
may be refined into gasoline or diesel fuel. Natural gas may be processed, transported and burned
to produce heat or electricity. Together they constitute two of the most important forms of energy
on this planet. They are highly sought after and thus valuable.
Petroleum was formed when the remains of ancient plant and animal life accumulated on sea
floors where they were overlain by layers upon layers of sediment. These layers did not remain in
place. They were distorted and folded by geological activity. Over millions of years, the intense
pressure and heat generated by friction transformed the organic matter deposited into those layers,
into what we call oil and gas.
Oil and gas are found together. A certain amount of gas is dissolved in the oil solution. This
is why leases always include both oil and gas. Saltwater is normally also present. These substances
migrate upwards over vast passages of time from a source rock such as shale to a rock layer or
formation where they become trapped. These traps may be the result of seismic activities such as
earthquakes which create faults. In other cases, oil and gas may accumulate in a natural dome
formation, where an impervious layer of rock acts as a sort of lid to contain the petroleum.
Oil is lighter than water, but heavier than gas. Gas being the lightest, collects in the high
points of the formation and pushes down on the oil. Saltwater being heavier than the oil collects in
the lower parts of the formation and pushes up on the oil. Both saltwater and gas help create
reservoir pressure which helps drive the oil to the well bore so it may be produced.
Although oil is a liquid, it does not exist in underground lakes, pools or streams. Rather it
is contained in an underground rock formation such as limestone or sandstone. In order for the oil
in a formation to be recoverable, the oil bearing formation must have two geological characteristics,
namely porosity or permeability. Porosity is the amount of open pore space in a rock. Permeability
is a measure of the connectivity or ability of the oil to flow through the pore spaces.
It takes both properties to make an oil well. The oil must not only be present but it must also
be able to flow or move through the rock formation, to the well bore. Recent technological
developments such as hydraulic fracturing and horizontal drilling allow us to artificially create these
conditions and thus produce formations, such as shale which, though they were known to contain
oil or gas were considered to “tight” to produce.
It is this interest in possible development of the New Albany shale that has in large part
fueled the latest leasing boom in Illinois, which has in turn caused farmers and land owners to seek
legal advice form their attorneys. Unfortunately, many practitioners who are familiar with most areas
of agricultural law, may not be as well versed in oil and gas. Hence, we seek to help educate and
inform attorneys who may be fielding calls from agricultural clients about oil and gas leasing with
increasing frequency.
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Historically, oil has been produced by drilling a well vertically from a turntable located on
the surface which rotates a bit on the end of a string of pipe. The well bore is drilled down and into
the oil bearing formation. If the desired reservoir characteristics of pressure, permeability and
porosity are present, oil in the formation will flow to the well bore, where it may then be pumped
to the surface, stored and sold.
More recently, “down hole” motors allow drill bits to be driven by remote control. Well
bores may now be directionally drilled horizontally, through the formation. This exposes much more
of the formation to the well bore, which is great for production purposes, but complicates things
from a legal perspective. It requires pooling or unitization of the mineral rights of all tracts which
are underdrilled. This issue is discussed in greater detail when we examine the pooling provisions
typically found in an oil and gas lease.
Exploring for oil and gas involves the interpretation and extrapolation of a great deal of
scientific and geological information. Nevertheless, it is still a risky venture, filled with uncertainty.
Despite man’s best efforts to map and contour geological formations thousands of feet below the
surface, we are still unable to predict with much accuracy, whether a particular formation will
produce paying quantities of oil, at a specific location. It is a hit or miss prospect. You do not
actually know, if you will find oil, until you drill a well and test the formation, to see if it will
produce.
This uncertainty and risk has been the rise and ruin of many careers, lives and even major
corporations. Mix in the ever changing economic factors such as drilling and operating cost, not to
mention politics, all of which impact the price of oil and you have an industry which is prone to
cycles, be it boom or bust. The opportunity to reach for the brass ring, while the risk of failure is
ever present is enticing. It requires a delicate balance of good science and good fortune.
Perhaps for this reason, the oil and gas business is both exciting and intriguing. The risk and
prospect of reward has a certain allure to it. In some aspects it resembles farming, which also suffers
or benefits from matters beyond our mortal control, like floods or drought. However, whereas
farmers tend to be more conservative and spend much of their time attempting to avoid and manage
those risks so as to hedge against them, “oil men” seem more than happy to take them on and roll
the dice.
In as much as most existing and proposed oil and gas development takes place in rural areas,
where farming is the main occupation, it is only natural that the two paths cross frequently. On the
one hand is the farmer who’s family may have derived a living off this ground for generations and
who would like to keep it that way. On the other hand, is an oil company looking for its next major
find that will fill its coffers while it moves on in search of its next play.
The intersection of these two divergent groups is where we find ourselves today - Oil and Gas
Leasing of Agricultural Lands. This issue has become more prominent as, due to new developments
and recent finds, oil and gas exploration in this State has moved from mostly marginal farm ground,
located in the southeastern portion of the State, into some prime agricultural areas located in the
central part of the State.
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Unlike most of Southern Illinois, in many of these new areas, the minerals have not been
severed from the surface, so the land owner/mineral owner is concerned with the impact the oil and
gas operations could have upon the use of the surface and the ability to continue to farm it. In cases
where the minerals have been severed from the surface, the surface owners likewise may be
concerned about the use of the surface and require counsel to advise them as to their rights and the
operators duties to protect and or reclaim it.
Moreover, the advent of horizontal drilling and completion, when combined with hydraulic
fracturing has opened up new prospects for development that were previously considered nonrecoverable. This new technology and development brings with it new surface uses and
environmental concerns, that landowners must weigh when considering whether to lease their land
for development.
The focus of our inquiry is from the landowners’ perspective, to understand the nature of the
relationship involved so that they will be better able to decide whether to lease their property and if
so, to negotiate lease terms that will better protect it. As with all bargains, balance is the key. The
agreement should be fair and reasonable. It should allow both parties to continue their respective
endeavors with a minimum of interference from the other. Some conflict is inevitable, but much of
it can be reduced by proper planning and drafting of the instrument.
Each land owner or mineral owner is unique and has slightly different priorities. The time
before the entry into the lease is the one and only time which the mineral owner has to negotiate the
terms and he or she is well advised to take advantage of it. The lease may continue for many years,
perhaps even generations. Consequently it is important that one think not only about the economic
advantages to be gained if the venture if it proves successful, but also the operational hazards and
difficulties it may pose.
With this in mind, we shall first examine the law of oil and gas in this State. Then we shall
turn our attention to the oil and gas lease itself, focusing on the meaning and effect of the various
paragraphs and clauses typically found in leases. We look at why the provisions are included in the
first place (i.e. What they do and how they work). We also consider what advantages or
disadvantages they may pose. Lastly, we suggest certain strategies or alternatives that may be
employed to address whatever concerns the land/mineral owner may have. We also address the
rights and duties of a surface owner, when the minerals have been severed from the surface.
No summary can be exhaustive. An oil and gas lease can be a complex instrument, which
can apply to a plethora of different circumstances, some of which may not have been foreseen or
anticipated. Many of the provisions interact with each other. The relationship, once established may
continue for decades. The sums of money involved may be substantial, so it is worth some time to
understand the instrument. One word of advice, when presented with an oil and gas lease, if you do
not feel comfortable, seek the assistance of an experienced oil and gas lawyer. Not all leases are the
same. They can be quite complicated. It is generally not a good idea to dabble in this field. With
that word or caution, we now turn to the substantive issues involved.
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Ownership of Oil and Gas Under Illinois Law
Historically, an owner of real estate, in fee simple absolute, was thought to own a pie shaped
cubit, extending from the center of the Earth, all the way up, to the heavens above. This traditional
rule of ownership is a gross over simplification which, as we shall see, does not truly apply in the
case of oil and gas.
Oil and gas are the residue of ancient animal or plant deposits, which have been compressed
under the surface of the Earth by tremendous geological forces for millions of years. Although they
may not be “minerals” in the true scientific sense, they are considered to be minerals, in the eyes of
the law. Gillette v. Chicago, Wilmington and Franklin Coal Company, 382 Ill. 241 (1943).
The word “minerals” in the phrase “including coal and other minerals,” has been held to
include oil and gas, as a matter of law. Nance v. Donk Brothers Coal & Coke Co., 13 Ill.2d 399
(1958). The legal definition of the term minerals is rather broad. It is akin to what we consider to
be natural resources which are found underground, that may be mined or removed.
The important point for our purposes here is that, oil and gas share a unique attribute which
distinguishes them from all other minerals, namely, they are fugaceous. Unlike hard minerals, such
as coal or limestone, they do not remain in place. Instead they migrate in response to changes in the
geological conditions. Oil and gas do not naturally or continuously flow, like water in underground
streams. Rather, they’re trapped in rock, sand or limestone formations, underneath the Earth’s
surface, where they are subject to near constant geological pressures, that hold them fixed in place.
While the natural conditions remain undisturbed, oil and gas generally remain in place.
However, oil and gas may migrate in response to either naturally occurring or artificial changes in
the surrounding geological conditions. For example, once an oil or gas bearing formation is
penetrated by the drilling of a well, oil and gas begin moving towards the well bore, being the point
of least resistance. It is this fugaceous quality of oil and gas which distinguishes them from all other
minerals. Moreover, it is this unique characteristic which is largely responsible for shaping the law
of oil and gas as we know it today.
Ownership Theory
Since we have only limited information concerning the geological landscape thousands of
feet below the surface and since oil and gas may migrate during the course of production, it is
difficult to say, with any degree of certainty, where a specific quantity of produced oil and gas, may
have originated. Depending upon the geological circumstances involved, oil produced from a given
well bore may have migrated from underneath adjoining acreage. Two questions are thus posed Who “owns” the oil and gas, while it remains in place and/or once it has been produced.
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Courts in various jurisdictions have grappled with the issues, resulting in different theoretical
approaches. Historically, oil and gas were likened to wild animals and or riparian waters. Due to
their fugaceous nature, they were referred to as minerals ferae naturae. As such, they were not
“owned” by anyone, while they remained in their natural state, but could only become subject to
ownership when reduced to actual possession or “capture.” This is an intriguing, if not accurate
concept, which despite being antiquated by modern science and technology, remains partially
relevant for legal purposes.
The point bearing emphasis is that the practical difficulty of identifying where oil and gas
originated, is perhaps the single most influential factor in the development of the law of oil and gas.
It has resulted in an ownership theory, which is unlike any other substance, known to the law.
Although the “rule of capture” remains the law in virtually all jurisdictions where oil and gas
is produced, the ownership theory of oil and gas in place, varies substantially by jurisdiction. The
analogy to wild animals or riparian waters has otherwise been abandoned, mainly because oil and
gas generally only migrate in response to some artificial disruption of natural forces occasioned by
man. Observation has revealed that they do not simply flow, naturally like water in an underground
stream, or wander about of their own accord, like wild animals.
A greater understanding of the nature and properties of oil and gas, has caused the law to
respond accordingly. The differences in ownership theory of oil and gas in place, which are
discussed below, though interesting, are perhaps less important than the rule of ownership once it
is produced, sold and realized into monetary gain. After all, that is the primary objective of most
owners and developers.
Ownership of Oil and Gas in Place
In some states, the owner of the real estate is said to own the oil and gas underneath the
surface. This theory is referred to as the “ownership in place theory.” This however is of little
practical consequence and can be somewhat misleading. The ownership is not the same as hard
minerals. It does not mean that one may prevent others from undertaking production activities, on
their own land, which may cause the oil or gas to migrate, because, while it remains underground,
oil and gas remain subject to the “rule of capture,” which is discussed below.
In other states, such as Illinois, the landowner does not “own” the oil and gas in place
underneath his or her property in a conventional sense. Rather he owns the “exclusive right” to use
his or her land to explore for and produce it. The owner of the mineral rights thus owns the
exclusive right to prospect for oil and gas by drilling a well on the property. Illinois is therefore
categorized as what is commonly referred to as an “exclusive rights” or “non-ownership theory”
state. See Williams & Meyers, Oil and Gas Law, Section 203, 203.1.
Under Illinois Law, oil and gas under the ground are not capable of ownership, separate and
distinct from the real estate. Murgarger v. Franklin, 18 Ill.2d 344, 163 N.E.2d 818 (1960). Due
to its fugaceous nature, its been said that there can be no such thing as absolute title to oil and gas
in place, underground. Reed vs. Texas Company, 22 Ill.App.2d 131, (1959); Poe v. Ulrey, 233 Ill.
56; Updike v. Smith, 378 Ill. 600 (1942); Trigger vs. Carter Oil Co., 372 Ill. 182 (1939).
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In Illinois, an owner of mineral rights owns merely the exclusive right, to prospect for and
attempt to, produce it. Pickens vs. Adams, 7 Ill.2d 283, 131 N.E.2d 38 (1956). Although one may
not own the oil or gas in place, they have a legally protectable right to explore for it and may prevent
and recover for an invasion of that right.
The Rule of Capture
The difference in ownership theory is largely academic as “the rule of capture” applies in
either case. Operation of the rule leads to essentially the same result by means of a slightly different
legal path, notwithstanding the distinctions between ownership theories involved.
According to the rule of capture, the person who owns the mineral rights of land where the
well bore is located, also owns any oil or gas produced therefrom, regardless of where it may have
originated. Oil and gas become personalty, capable of ownership separate and distinct from the land,
only after severance from the realty (i.e. the moment it enters the well bore). Until that moment, it
remains subject to capture by other producers that have a well bore which penetrates into the same
oil bearing formation. Until oil or gas is actually produced, severed from the real estate and reduced
to physical possession, it remains subject to capture, by anyone legally producing from the common
source or supply Trigger vs. Carter Oil Co., 372 Ill. 182 (1939) and Continental Resources of
Illinois vs. Illinois Methane LLC, 364 Ill.App.3d 361 (5th Dist. 2006).
The rule of capture is not only a rule of necessity, it is pragmatic as well. It recognizes the
risk borne by the parties who drilled the well. If they had to share the bounty of their efforts with
their neighbors, because some of the oil and gas being produced is draining from beneath adjoining
land, they would be less inclined to make the investment required to prospect for and produce it. The
rule of capture, thus in a very simplistic, yet efficient manner, correlates risk with reward. It balances
the correlative rights of parties to exploit a common reservoir, with the entrepreneurial initiative
necessary to do so. Simply stated the law resembles the often quoted phase - “finders keepers, losers
weepers.”
As a consequence, a landowner has no cause of action for drainage caused by a neighboring
well. The oil which is produced becomes the property of the person who captures it through a lawful
well, bottomed on his or her land, regardless of the fact that the oil may have migrated from beneath
neighboring property. The neighbor’s remedy to prevent drainage is, to go and do likewise.
This rule creates competition, promotes recovery and rewards initiative, but it is not without
its draw backs. This sort of “everyman for himself” philosophy, may in fact over promote drilling,
which could in turn, lead to a rapid decline in reservoir pressure and ultimately less production from
the formation than would be realized in a more gradual, controlled development program. That
however, is an issue which is beyond the scope of the current discussion. Those issues are more
appropriately considered in the context of an examination of administrative regulation, correlative
rights, secondary recovery or unitization. Having discussed the nature of oil and gas ownership, we
now turn to another rather unusual aspect of mineral rights, being the severability of those right from
the surface.
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Severance of Mineral Rights
Ownership of real estate has been likened to a bundle of twigs. The bundle is comprised of
an almost infinite number of rights or uses of property. The right to exploit minerals, is but one of
the twigs that is included in the bundle. It may be severed, split off, taken out of the bundle and
conveyed away, to a third party. Alternatively, it may be reserved, when the rest of the rights are
sold. Either way, it may be owned separate and apart from the other rights and that severance is a
matter of substantial legal consequence.
There are essentially two ways of severing mineral rights from the surface or other rights.
One is by reservation, wherein the Grantor conveys the real estate, but reserves all or a portion of
the minerals. The second is by express grant, where the owner of the real estate expressly conveys
the mineral rights to a third party.
Much confusion has been created by deeds which “except” all or a portion of the minerals,
rather than reserving them or making the conveyance subject to prior reservations or grants. It may
be unclear whether an exception refers to a current reservation or a prior grant. This confusion is
compounded by the fact that title insurance policies typically do not cover minerals.
Although Illinois case law recognizes “exceptions” to the granting clause of an instrument,
the same as a reservation, it is better practice to avoid using the term “except” when drafting a
mineral conveyances. Instead, expressly refer to the mineral rights in issue, as either prior or current
grants or reservations, depending on the circumstances. That way, the parties intentions are clear
and much heartache and expense may be avoided litigating the effect of the instrument, sometimes
long after the parties themselves have departed.
To further complicate matters, mineral rights can be divided several ways. They may be
divided into terms, by time, or three dimensionally, by formation. The ability to slice and dice
mineral ownership by time or space can result in an almost infinite number of possibilities, that can
make determining title very challenging. Each case must be judged on its own particular facts.
Lastly, the construction of instruments of conveyance has led to a host of rules, intended to resolve
ambiguities, many of which may actually lead to results which may be contrary to the parties’
subjective intent.
The general rule is, minerals including oil and gas are conveyed unless reserved or excepted.
In a warranty deed, the Grantor warrants title to the real estate, including the minerals, unless the
minerals have specifically been the subject of an exception or reservation Updike vs. Smith, 878 Ill.
600 (1942).
The act of splitting the minerals from the other land rights is referred to as “severance”.
Whenever minerals are severed from the surface, two distinct estates come into being. The mineral
estate and the surface estate. These two separate estates may be conveyed and subdivided as any
other interest and real estate Shell Oil Co. vs. Moore, 382 Ill. 556 (1943). When the minerals are
severed from the surface, the question arises as to the mineral owner’s right to use the surface to
miner or produce the mineral.
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Implied Easement
A mineral estate is a “freehold estate” under Illinois law. As such, the owner of it is entitled
to all the usual remedies of law and the equity for protection of the rights and incidents of ownership
of real estate. As aforestated, oil and gas are incapable of separate distinct ownership because of
their fugaceous character, until they are actually found and produced. The important point for our
purposes here, is that a deed to minerals carries not only title to solid minerals, but also what is
necessary to acquire title to or possession of the fugaceous minerals, meaning the right to enter,
explore and attempt to reduce them to possession Pickens v. Adams, 7 Ill.2d 283 (1956).
More specifically, a severed oil and gas interest, carries with it an implied right to use so
much of the surface as is reasonably necessary to enjoy the mineral estate Jilek v. Chicago,
Wilmington & Franklin Coal Co., 382 Ill. 241, 47 N.E.2d 96 (1943). For example, a certain
amount of surface is necessary to build roads, drill wells, and if successful, lay flow lines, electric
lines and erect storage tanks, etc.
The law implies a right to use the surface, to access the severed minerals, in much the same
way the law implies an easement over land adjacent to a road, in order to access a tract which would
otherwise be land locked. In the case of minerals, the right of access is both vertical and horizontal.
Where there has been a severance, the mineral estate is the “dominant estate” and the surface
estate is the “servient estate”. The servient estate bears a burden of use, in favor of the dominant
estate as it is necessary for the owner of the severed minerals estate, to use some of the surface, in
order to benefit from, or enjoy the mineral estate.
The right is one of reasonable use, not any use. It extends to both primary and secondary
recovery, but it is not without limitations. What is reasonable, depends upon the circumstances.
Most recently, there has arisen a question as to the extent of surface use occasioned by tertiary
recovery efforts, which may contemplate intensive drilling patterns, of up to one well per acre. The
reasonableness standard has not yet been applied to those circumstances. It is submitted that it
would not be permitted, if it would substantially interfere with the landowner’s primary use of the
surface.
In addition, the right to use the surface is limited to production from that tract. It does not
include the right to use the surface as a launch site for a horizontal well bore that underlies and thus
produces oil from adjoining property. In such cases the oil operator must obtain the surface owners
permission to do so.
Surface Rights
When there has been no severance of the minerals from the surface, there is little dispute as
to these rights as the lease agreement itself, contains provisions and covenants which address surface
uses. However, where the minerals have been severed from the surface, the surface owner often
times, finds him or herself , subject to uses of which they were previously unaware, that can
negatively impact their use and enjoyment of the surface including farming. Most title insurance
policies don’t cover minerals and thus surface owners may not appreciate the significance of the
mineral severance or the implied easement which arises therefrom.
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In these cases, the surface owners have to put up with all of the adverse effects associated
with oil and gas operations, but enjoy none of the resulting benefits. This often leads to acrimony.
It is fertile ground for litigation, dispute and in some cases can result in vandalism or interference
with production.
In most cases, the surface owner unwittingly finds themself holding what they perceive to
be the short end of the stick, albeit one that was removed from the bundle of rights, before they
purchased it. Not being aware of the pre-existing legal situation, it seems unfair. Surface owners
often become angry or upset, when the operator commences new drilling or reworking activities and
they discover that they are not going to be in on the deal.
Hence, the beginning point of discussions and negotiations with surface owners, starts with
an explanation of the parties’ respective rights, duties and obligations to one another. In my personal
practice I have found it beneficial to send the surface owner a letter of explanation, outlining the
situation, citing relevant authority and inviting them to review their rights with a local attorney who
is experienced in oil and gas matters. The first step is education. Once the surface owners
understand what legal rights the oil and gas operator has and/or what rights the surface owner has,
or does not have, the negotiations can be more productive.
Regardless of the fact that the owner of the mineral estate has an implied easement over the
surface, the reality is that the surface owner is there all the time and can be a thorn in the operator’s
side, if a dispute ensues. Consequently, it is advisable to negotiate in good faith and attempt to
establish a certain amount of good will, or buy peace with the local surface owner. An introductory
letter which is not threatening or heavy handed, but supported by the facts and reference to the
instruments of record, statutes and case law, can go a long way towards establishing credibility,
without evoking hostility. Sometimes a small override or bonus payment, beyond actual crop
damages may be paid to the surface owner. Each operator must make that call for themselves,
depending upon the particular situation.
This friction between surface owners and mineral owners/developers has resulted in
legislation. It was the primary impetus behind the Drilling Operations Act, 765 ILCS 530/0.01 et.
seq. which is discussed in further detail below. It deals with the right and duties of the operator and
the surface owner. Counsel for the surface owner should become familiar with the statute. After we
discuss the Act, we will then turn to an examination of the oil and gas lease itself and the
relationships, rights duties and obligations that arise therefrom.
The Drilling Operations Act
In an effort to assuage the surface owners, the legislature has passed the Drilling Operations
Act, to require operators who drill new wells, to notify and meet with surface owners to discuss
certain issues, such as the location of roads etc. in an attempt to work out a mutually agreeable
solution, before any new wells are drilled. Failing that, there are provisions for calculating damages
to the surface and tendering payment to the surface owner.
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The Drilling Operations Act is a significant departure from prior common law, in one
important respect, namely, that it purports to make the operator continually liable for land taken out
of production by reason of any new drilling operations. This obligation could be substantial.
Therefore, it is necessary to understand when the Act applies and when it does not.
Applicability of Act
The Drilling Operations Act only applies to the drilling of new wells. It does not apply to
re-working operations 765 ILCS 530/3. Moreover, the Act only applies when the surface owner has
not consented in writing to the drilling operations and a.) there has been a complete severance of
the ownership of the oil and gas from the ownership of surface or b.) where the surface owner owns
an interest in oil and gas which is the subject of either 1.) an integration proceeding brought before
the Illinois Department of Natural Resources pursuant to 225 ILCS 725/1 et. seq. or 2.) a civil
proceeding brought in State Court pursuant to the Permissive Drilling Statute 765 ILCS 520/0.01
et. seq.
If the surface owner executes a written agreement or a release, then the Act does not apply.
Any such document should be clear on its face, that the landowner is accepting a lump-sum payment
in full satisfaction of all current and future damages, including the right to all future compensation
for the land being taken out of production. This presents an interesting, but unresolved question as
to the effect on future owners, specifically, whether the current owner can waive a successor’s right
to future compensation, for land taken out of production by reason of the new drilling operations.
Time will surely tell. In the meantime, it is advisable for the operator to obtain a written release
whenever possible. By the same token, the surface owner should be careful to understand any
proposed release before signing it.
Another similar, but unanswered question is likewise presented, when the surface was
severed from the minerals after the property was leased. In my opinion, the Drilling Operations Act
does not apply to these situations. The lease (i.e. written agreement) was made with the person(s)
who owned the surface at the time. The lease thus constitutes an “agreement in writing” to the
drilling operations, and it includes an express easement for the right to use the surface. The grant
of that easement is in the chain of title and all subsequent conveyances are on notice of and subject
to it. This issue has not yet been litigated in this State. Parties should recognize that political and
public opinion appears to be shifting towards surface owners and it would naive to think that such
fores could not influence a Court’s decision.
There is also a question as to the validity of the statute’s requirement that the operator
compensate the surface owner for the loss of value of commercial crop corresponding to the lands
taken out of production, because of the use thereof by the operator for roads and production
equipment. Said provision requires the operator to pay to exercise a right (i.e., implied easement)
which it already possesses.
If the minerals were severed first, then the surface owner acquired the property, subject to
that severance and the implied easement arising from it. The right to use as much of the surface, as
is reasonably necessary, was acquired along with the mineral rights from the original owner and the
original owner of those rights was paid consideration and compensation for them.
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Both the Illinois and Federal Constitution prohibit taking of property without due process of
law. The statute, which is largely a compromise of special interest groups, requires the operator
proposing to drill a new well, to pay additional damages, each year, for the value of the crop that
could have been raised on the land which is taken out of production, in order to exercise a right
which he already has. This issue also has not been decided by any Appellate Court in Illinois and
may likely not be in the foreseeable future, given the cost of litigation and appeals, relative to the
damages sustained.
Lastly, for those that have attempted to comply with the Act in the absence of an agreement
with the surface owner, there are many questions concerning the procedure for appraising and
tendering payment for damages (See 765 ILCS 530/6). In summary, it appears that the recent
amendments to The Drilling Operations Act, were well intended, to provide guidance and diffuse
what could be an incendiary situation, but in practice, provide us with more questions than answers.
Despite the foregoing, the Act should be consulted whenever the owner of the surface is presented
with a release or the prospect of having a well drilled on their land.
Understanding the Oil and Gas Lease
and the Relationship of the Parties
As previously stated, a landowner or mineral owner owns exclusive right to explore for and
produce oil. Although a landowner could drill a well on his or her own property, if he or she were
so inclined. Most are not willing to risk the substantial investment required to do so. A rather large
commitment of capital is necessary and there is a significant risk that no production will result.
Further, drilling of oil wells requires a degree of expertise that most landowners do not possess.
Exploration companies that specialize in prospecting for and producing oil and gas have
evolved to meet this need. In a typical arrangement, the landowner or mineral owner enters into a
lease with the oil company, wherein the landowner/mineral owner is the lessor and the oil or gas
company is the lessee. The landowner grants the oil company/lessee the exclusive right to come onto
the property to prospect for oil and gas. The lease provides for consideration to be paid to the
landowner/mineral owner in exchange for the right to enter, explore and produce.
Typically in the Illinois Basin, the landowners or mineral owners collectively, retain the
rights to 1/8th of any oil or gas which is ultimately produced. The lessor’s 1/8th interest is
commonly referred to as “royalty.” The lessor/royalty owner bears none of the expenses associated
with drilling, completing, equipping, or producing wells. The Lessor’s contribution to the venture
is the mineral rights, being the exclusive right to drill or explore.
The lessee/exploration company, is conversely granted the rights to 7/8ths of any oil and/or
gas which is produced. However, the lessee bears all of the expenses for work required to drill,
complete, equip, and produce the well. The lessee’s interest is therefore commonly referred to as
“working interest.” The disparity in the percentage of the parties’ rights to the oil or gas produced,
is a function of the fact that the lessee bears all of the risks and expense associated with the project.
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In the last couple of years increased leasing competition associated with the proposed shale
play in Southeastern Illinois has caused royalties to be raised from 12% to upwards of 18.5%. This
in turn has posed some difficulty for operators proposing more conventional vertical development
of less desirable areas as the economics may not support such large royalties.
Regardless of the foregoing, an oil and gas lease usually contains certain provisions and
express covenants with respect to the parties’ rights and obligations, including the lessor’s duty to
search for and produce oil. Additionally the lease imposes upon the lessee an implied duty to act in
a reasonably prudent manner. These customary provisions and implied duties are the subject of our
discussion below.
Form Leases
Before we begin our examination, it is important to note that there is no such thing as a single
“standard form” oil and gas lease. Instead, there are several different variations, on a common
theme. The much heralded “Producers 88" rarely appears in its original form anymore. Typically
it has been substantially revised even though it still carries the original monicer. Such revised forms
include a whole range of pre-printed documents, each of which is a compilation of various lease
provisions, that have been inserted and modified over the years. Unfortunately, much of the
terminology is antiquated and/or unnecessarily confusing. In reality, most “form” leases are merely
a culmination of various common lease provisions, which have been cut and pasted into a form
document, in a sort of cafeteria plan of draftsmanship. As such, they often suffer from lack of
continuity and clarity.
Like all form documents, a form lease should be viewed with a certain amount of
circumspection. Circumstances often vary and the lease should follow suit. It is important to tailor
the lease, to the specific situation at hand. Although most leases contain common provisions, they
are not identical or uniform. With the advent of computer word processors, reliance on pre-printed
stationary forms is no longer necessary. A professional looking document can be produced by
almost anyone in a few minutes.
In this case, one size does not fit all. It actually fits very few. When deciding upon what type
of lease to employ, common sense should prevail. Consider eliminating provisions which are not
applicable or which are extremely difficult to understand. Also consider adding provisions regarding
clean up. Lessors appreciate knowing how the surface is going to be restored, pits filled and drilling
mud disposed of. Many of these thing are items that a responsible operator intends to do anyway.
Including them in a lease often makes a good first and lasting impression, upon both landowners and
tenant farmers. Simple headings may also help to organize various provisions an increase everyone’s
understanding.
The first step is to read the document to see if it makes sense. Some provisions are inherently
complicated and may be confusing, others are unnecessarily so. If you are having trouble
understanding a provision it may not be for lack of information, but may be due to poor drafting.
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Unless there is some compelling factual or legal reason to keep something in, omit it. A lease
which is straight forward, is easier to explain to potential lessors and is less likely to be
misunderstood and result in controversy. Many of the provisions which can be found in older leases,
originating from other areas of the country are simply not applicable in the Illinois Basin, at this
point in time. They have been preserved out of ignorance or a fear of deviation from the past. It is
time that some of these provisions be laid to rest.
For example, it is doubtful that an operator needs to erect barracks to house workers. State
agricultural regulations require that all lines must be buried at least 36 inches below the surface,
rather than simply below “plow depth”. Offset wells are rarely less than 200 ft. away from a location
as spacing regulations require that they be at least 330 feet from the lease boundary/property line.
Landowners should not be allowed to use native natural gas to heat their own personal residence or
barns. It would be unreasonably hazardous to allow them to do so and the operator could be liable
for an interruption of supply. The operator may not need to use water from the landowner’s pond
or lake. Nevertheless, such provisions still find themselves in many “standard form” leases.
The key to drafting a good instrument is to review the lease, to separate the wheat from the
chafe. There are certain phrases or terminology in leases which have settled legal meanings and are
deserving of retention. Other portions are irrelevant and should be deleted. The following is a
discussion of common lease provisions.
Common Oil & Gas Lease Provisions
Introduction
The opening paragraph of an oil and gas lease includes the date of the agreement and
identifies the parties. The parties’ full names, address and marital status, if applicable, should be
stated. In the absence of an agreement to the contrary, the date listed is the effective date of the
lease. It is one of the most important provisions of the lease because it is the date from which the
“primary term” is measured. As is discussed below, the primary term of the lease is the initial, set
duration of the lease.
Grant
The granting clause includes an express statement and acknowledgment of the consideration
received by the lessor and the rights being conveyed to the lessee, including the exclusive right to
prospect for oil or gas, on a specified tract of land, for a specific term. The granting clause also
includes the right to test the property for oil and gas purposes, including seismic or geophysical
testing. It also usually includes the right to inject salt water and other substances underground to
enhance recovery.
Under Illinois law coal bed methane and coal mine methane are considered to be part of the
coal estate Continental Resources of Illinois vs. Illinois Methane LLC, 364 Ill. App.3d 361 (5th
Dist. 2006. As such leases often exclude coal bed methane from the grant.
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Surface Easement
The lease usually contains some provision regarding the Operator’s right to use the surface
in connection with the oil and gas operations. The operator is given the right to build roads, drill
wells, set storage tanks, lay flow lines, injection lines and power lines and dig pits, etc. The lease
also includes the right to use the surface in connection with secondary recovery operations. It grants
lessee the right to inject saltwater, gas or other mediums into subsurface strata in order to stimulate
or enhance production. In connection therewith, the lease should make it clear that these rights are
part of the basis of the bargain and that the lessor is being paid consideration, in exchange for them.
The easement rights set forth in the lease, should not be confused with cases where the
minerals have been severed from the surface, where the right to use the surface is implied from the
circumstances. If the lessee owns the surface estate, the lease constitutes an express written
agreement with that party to allow the operator to engage in certain activities and also provides for
the additional compensation to be paid to the land owner for the privilege of doing so.
In cases when the minerals have been severed from the surface, the owner of the minerals
can only convey the implied rights he or she has to the Lessee. Owners of severed minerals are often
confused by this and better practice suggests that a paragraph be included in the lease to better clarify
this point.
Property Description
The lease must contain an adequate description of the premises involved. The description
should be certain enough, that a person could locate the property without reference to extrinsic,
unrecorded documents or information. A description that is in accordance with the Standard United
States Geological Survey is sufficient. Irregular, meets and bounds descriptions should conform to
the Grantor’s chain of title. Any reference to previously recorded instruments must also include the
recording information for those documents.
The lease will also include a numerical statement of the amount of acreage covered by it.
This figure will be utilized to determine the amount of bonus or delay rental paid. It is also used for
determining unit/pool participation, for purposes of allocating royalty amongst several mineral
owners. It may not be exact, but it should be reasonably close.
Production on any of the leased property continues the lease as to all of the described
property, as per the habendum clause discussed below. Similarly, if any of the leased property is
included in a pool or unit, production from the unit maintains the lease in its entirety, even as to
property not included in the unit.
The legal description is particularly important because, absent divisability, the lease may tie
up a substantial amount of acreage, for an indefinite period of time. Therefore it is recommended
that non-contiguous tracts be included in separate leases. There are also other provisions, such as
a Pugh Clause, which requires the lessee to release acreage as to undrilled locations or undeveloped
portions of the leasehold premises that will serve to mitigate this problem.
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Bonus
Often times the lease does not make reference to the actual consideration paid to the lessor
for signing the lease. The bonus is the amount paid to the Lessor as consideration for the primary
term. Under such a “Paid Up” Lease the Lessee has no obligation to commence any operations
during the initial primary term. The Bonus is essentially the rent paid by the lessee for the privileges
granted. Historically, very little bonus was paid. In recent years bonus money has become
substantial.
The amount of bonus is a point of negotiation based upon the competition of the marketplace.
It may be indirectly related to the amount of royalty. Some leases may provide for more bonus
money and less royalty or vice versa, depending upon the Lessor’s desires. Some Lessors view the
bonus as a bird in the hand, whereas other view the royalty as a long term opportunity.
Special attention should be paid to the method of payment of the bonus. Lessors prefer to
be paid when the lease is executed and delivered. Many lessees want to delay the payment until title
has been cleared and will issue a draft or order of payment for the amount due. Lessors should
understand the potential risk involved, before delivering the lease.
Royalty Clause
Royalty is a form of rent paid by the lessee, in addition to the bonus. It is the Lessor’s share
of production, free and clear of all expenses. The royalty clause determines what portion of the
production or gross revenue will be paid to the lessor. Typically, the amount is 1/8th, but it is a point
of negotiation, which depends, in large part, upon the parties’ respective bargaining power.
Many leases include a provision concerning the lessors’ right to accept the royalty share “in
kind.” Such right is rarely exercised but it does have the effect of reserving title to that portion of
the oil in the lessor and protects it from attachment by creditors of the lessee/operator. As a practical
matter, the oil is marketed by the operator to a crude oil purchaser such as a pipeline company and
the proceeds are paid directly to the royalty owners by the crude oil purchaser in proportion to the
lessee’s ownership interest.
A significant amount of litigation has involved how the royalty is calculated, whether it is
based upon the sales price or the “market value.” In most instances the two are the same, but in
cases where the market is volatile, there may be a difference. There is a division of authority
amongst the states and many states have never squarely addressed it. Without getting into the debate
too deeply, mineral owners should be aware that certain post production expenses referenced in the
lease may be deducted from the royalty. This is more often the case with gas than with oil due to
the fact that oil may be stored, sold and trucked off site, whereas gas must be gathered, treated,
processed and condensed before it is injected into a pipe line.
Historically royalty in the Illinois Basin was 1/8th or 12%. More recently, leases in
Southeastern Illinois have provided for royalties in the amount of 17% - 18.75%. The royalty is
usually stated separately for oil, gas, casing head gas and other products but the percentage is usually
the same. In many leases post production expenses for treating, drying and compressing the gas are
deducted from the proceeds in determining the royalty to be paid to the Lessor. Such expenses are
less common with oil.
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As is noted below, the royalty is subject to the “pooling clause” or the “lesser interest clause”.
The Lessor is only granted his or her percentage of mineral ownership, on that portion of the leased
premises, which is contributed to the drilling unit. To illustrate, if a mineral owner having a 1/8th
royalty only owned 1/2 of the minerals, on a ten acre tract, being one half of a twenty acre drilling
unit, then they would receive 1/32 =1/2 x 1/2 x 1/8 of the gross revenue.
Shut In Gas Clause
The shut in gas clause is normally stated as a subparagraph of the royalty clause. It applies
when a well is capable of producing gas, but is “shut in” due to a lack of an ability to market the gas.
The inability to market may be due to the lack of the gathering system, processing facililty or
pipeline. As aforestated, unlike oil, gas must be gathered, processed, treated and compressed in
order to be sold and put in a pipeline. It may take significant amount of time to build the
infrastructure necessary to do so. The shut in gas clause provides for a form of delayed rental which
prevents the Lease from terminating in the interim.
The rental is usually calculated on a per acre or per well basis. Payment is typically due at
the end of the year. Shut in clauses have a legitimate basis in gas projects, but should never apply
to oil wells, since oil can be pumped to a tank stored, sold and trucked off the leasehold premises.
If a lessor is only seeking to produce and market oil, the shut in gas well clause can be omitted in its
entirety. It is often times a source of confusion to lessors and may be of no benefit to the lessee.
On the other hand, if the Lessee is legitimately interested in producing natural gas, then the
shut in gas clause has relevance. Nevertheless, there is some concern that the shut in gas clause may
be utilized as a way of extending a Lease for little economic remuneration. Furthermore, there may
be no limitation upon the number of years that the rent may be paid and the lease extended. In cases
involving exploration for gas, where the shut in gas well clause has a legitimate basis, it may be
advisable to place a limitation on the number of years that the right may be exercised. For example,
a lease may provide that it may not exceed 3 years. This gives the Lessee some limited leeway, but
prevents the lease from being extended indefinitely.
Although there is some concern that the shut in gas clause could be utilized to extend a
Lease, keep in mind that the Lessee must drill a well in order to take advantage of the clause. It
seems unlikely that a Lessee would incur the expense necessary to do so, merely to perpetuate the
Lease. However, it is conceivable that a well could be drilled on a unit which encompasses parts of
several leases, with the intentions of producing oil only to find out that it is only capable of
producing gas, in which event the shut in gas clause could come in to play to hold substantial
amounts of acreage, perhaps for speculative reasons.
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Lease Term
Primary Term
The primary term of the lease is a definite period of time, determined as a point of negotiation
with the mineral owner, during which the Lessor has the exclusive right to come onto the property
to explore for and attempt to produce oil or gas. The primary term is the time in which the Lessee
has to commence drilling or other production activities. If no such activity is commenced within the
time period stated, then the lease lapses and the working interest reverts back to the owner of the
mineral rights. Production efforts must be started, but need not be completed within the primary
term. If commenced timely, the operator will be afforded a reasonable period of time to conclude
them and hopefully to begin producing oil.
The lease may or may not state what if any preliminary actions are sufficient to constitute
“commencement” of operations for purposes of extending the lease. For example, is merely staking
the location enough? As such, it may be a good idea to spell this out in more detail to avoid dispute.
The lease may require “actual drilling” rather than commencement of operations.
Traditionally, Oil and Gas Leases proposing conventional vertical development have had a
primary term from 1 - 2 years. Horizontal development of Shale may require significantly more
time, to acquire the necessary leases, institute a drilling program and develop the field. Horizontal
exploration is a much larger, more complex and expensive project than the drilling of a single
vertical well on a small spacing unit. Lessee’s prefer to get all or most of the leases in an area signed
and recorded before undertaking the actual exploration and development as a substantial find would
cause the price (i.e. Bonus and Royalty) of surrounding acreage to increase dramatically.
Furthermore, it takes a significant amount of time to do the necessary title work to determine who
owns the mineral rights in a large area of interest. The units on horizontal completions are much
larger than in vertical development. Hence, the title work is more complicated and time consuming.
Therefore, longer primary terms of 4 - 5 years are typical in leases which propose that type of
development.
The point is the primary term should be commensurate with the scope of the project
undertaken. In some cases, it may be necessary to lease a substantial number of tracts of land in
order to conduct seismic testing or widespread secondary recovery efforts. The primary term may
also turn upon the extent of development in the area. If it is a hot property, then the term may be
shorter than if there is no other production in the vicinity.
Most disputes involving the validity of leases involve the continuation of the lease, after the
primary term, in accordance with the habendum clause. This extension of time is referred to as the
secondary term.
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Secondary Term
Habendum Clause
After the expiration of the primary term, the lease continues as long thereafter as oil and gas
and other hydrocarbons or their constituent products are being produced. This provision is known
as the habendum clause. Some leases require that the production be in “paying quantities.” This does
not mean that the operator is required to continuously produce oil everyday, without interruption.
Things happen. Machinery breaks down, lines leak, formations channel. The lease continues to
remain in force as long as reasonable efforts are being made to repair the equipment or to
recommence production.
It is the effort to produce, which perpetrates the lease, not the results of those efforts. The
secondary term of the lease continues, as long as reasonable efforts are being made to continue
production. What is reasonable, depends upon the circumstances of each case Gillespie v. Wagoner,
28 Ill.2d 217 (1963).
For example, in flood prone areas it may be reasonable to shut a well down for a significant
period of time each year when the water is high. In other cases, cessation of production for 6 months
may not be reasonable and may result in termination. Lack of funding to make necessary repairs is
not an excuse.
On the other hand, a lessee can not perpetuate a lease, by intermittently producing only a
minimal amount of oil. The effort must be reasonable, given the circumstances. The rationale
underlying the provision may be summed up as follows: “paint or get off the ladder”. If the lessee
is not going to make a legitimate effort to produce, then the lessor should be relieved of the
obligation and should be afforded the opportunity to lease the premises to an operator who will.
Determining whether a lease remains valid can be difficult. The standard is easy to state but
may be difficult to apply. The test or standard remains constant, but the facts to which it is applied
varies greatly and can change over time. What is reasonable lies in the eye of the beholder. It is
difficult to predict how a court will rule on close cases. Consequently it is advisable to include a
provision which expressly states the duration of cessation of operations which will result in
termination. A term of 120 days is a reasonable period of time, in most instances.
The habendum clause is not divisible. It is an all or nothing proposition. Absent a Pugh
Clause, continuous drilling clause or other similar provision, production on any portion of the leased
property, perpetuates the lease as to the whole property. The failure to develop a portion of the
property does not release the lease, as to that undeveloped portion. Moreover, production efforts on
land that the leased premises are pooled or unitized with, may continue the lease, under the
habendum clause. This rule can lead to some harsh results. Consequently, drafters have developed
specific lease provisions to deal with such an occasion, that afford the mineral owner some relief.
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The continuous drilling clause counteracts the indivisibility of the habendum clause. It
requires the lessee to continue to develop the subject acreage, in order to keep it. It prevents the
lessee from holding the entire lease by continuing production on only a small portion thereof. In
fairness to the landowner, if the lessee is not going to continue to develop the area, then the mineral
owner should have the opportunity to lease that portion of the premises to another operator, who is
willing to fully develop the property.
Also, an “entirety clause” may keep a lease in effect as to a all of the described acreage, even
though the premises were subsequently divided into separate tracts and no production efforts have
been undertaken on the particular portion in question Schwarm v Mexia Holdings, 308 Ill. App.
3d 587 (5th Dist 1999). Hence, a Pugh Clause requires the surrender of undeveloped property which
is not included in the unit. If the lease does not include a Pugh Clause, it is recommended that one
be inserted.
Continuation for Injection Purposes Only
The Habendum Clause is a necessity, but some leases contain an additional provision which
purport to allow the lease to continue only for injection purposes, despite the fact that oil and gas are
not being produced from the leasehold premises. In such case, the Lessors’ premises are being used
merely for disposal or injection purposes, without there being any countervailing benefit. It is
perfectly reasonable to re-inject salt water produced from the Leasehold premises back into another
well also located on the Leasehold premises. Furthermore, it may likewise be reasonable to inject
water produced from a unit into another location in that same unit. However, it is unreasonable to
use a Lessor’s property merely for disposal purposes in perpetuity without paying anything for it.
Such clauses should be omitted from the lease.
Cessation of Production
Although it is not necessary to constantly produce oil, in order to keep the lease in effect,
it is necessary to have ongoing efforts in that regard Gillespie v. Wagoner, 28 Ill.2d 217 (1963).
The test is what is reasonable given the circumstances. The mere fact that it may not be profitable
to produce oil is not sufficient justification for the failure to act. It does not prevent the lease from
expiring. The law attempts to balance the parties’ respective rights and obligations concerning
operations. The lessee does not have a duty to the lessor, to continue to attempt to produce oil where
it is not profitable, but the failure to do so results in the termination of the lease.
No notice of the termination of a lease for non-production is required. A lease terminates,
of it own accord, due to a cessation of production. Once the lease is terminated for non-production,
it may not be revived by recommencing production Belden v. Tri-Star Producing Co., Inc., 106
Ill.App.3d 192 (5th Dist. 1982). Production efforts are not the only matters which must be taken into
consideration in determining whether a lease remains valid. Whether cessation of production results
in the termination of the lease, also depends on whether other provisions allow the lease to continue,
in certain circumstances, notwithstanding the cessation, such as by the payment of delay rental for
a shut in well.
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Continuous Operations/Dry Hole Clause
Certain lease provisions allow a lease to remain in effect for a certain period of time, in
specific instances, despite the failure to produce, such as in the case of the drilling of a “dry hole.”
In such event, the dry hole may buy the lessee some additional time to drill another well, even after
the primary term has expired.
The Dry Hole or Continuous Operations Clause extends the lease past the primary term as
long as operations are promptly prosecuted and ongoing. The clause extends the lease as long as
there is no cessation of operations for a certain period of time, usually between 90 - 120 days. The
clause works much the same for both drilling and reworking operations. The idea being that the
Lessee is making a continuous good faith effort to produce and the lease continues as long as those
efforts continue. Absent a provision to the contrary, the Dry Hole/Continuous Operations Clause
applies to pooled acreage. Operations anywhere on the unit or pool may continue the lease in its
entirety, in the absence of a limiting provision to the contrary.
Pooling
In light of the operation and effect of the habendum clause, it is important to carefully review
the lease provision concerning pooling. Pooling is the right to combine tracts for purposes of
establishing a drilling unit or drilling location, as per IDNR spacing regulations. If the spacing rules
require a 40 acres location, the pooling clause allows the lessee to combine part of the leasehold
premises, with other property, to attain the regulatory requirement.
In cases where tracts from different leases are pooled together to create a drilling unit, there
must be some method of allocating the production from those wells. The pooling clause includes
the formula by which the production is divided. Normally the production is divide on a pro rata
basis, according to the amount of surficial acreage contributed to the drilling unit. Therefore, if 10
acres is contributed to a 40 acre drilling unit, the owners of the minerals of that 10 acres would be
entitled to 1/4 of the royalty.
The pooling clause can have the effect of causing a lease to remain valid, where it would
otherwise lapse, due to a cessation of production. Production on the land which a portion of the
leasehold premises are pooled with, may hold the lease as to all of the described acreage. To avoid
the operation and effect of the Habendum Clause, it may be advisable to limit the size of the units
which may be formed or the amount of acreage which may be pooled, to 40 acres for a vertical well
plus or minus 10% as 40 acres is the largest spacing unit applicable to a vertical well.
Larger units, upwards of 640 acres are proposed for gas wells and horizontal oil wells
involving hydraulic fracturing. Current IDNR regulation allows 40 acre units to be stacked NorthSouth or East-West for horizontal wells. The normal set back rules apply, but the horizontal drilling
unit may cross section lines. The vast size of the units raises some concern about the ability of the
lessee to hold many leases which may include tracts located outside of the unit. For this reason it
is recommended that a Pugh Clause or some variation thereof be included to prevent this from
occurring.
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Unitization
Some leases also allow the lessee/operator to unitize the leased premises with other
leaseholds. Unitization is similar to but different from pooling. Pooling is combining tracts to create
a spacing unit. Unitization is the combination of spacing units. Unitization is the procedure by
which multiple leases are combined for purposes of operations. Such treatment is appropriate and
perhaps even necessary in the case of secondary recovery, as the injection of salt water into a
reservoir, may cause oil and or gas to move or migrate across lease boundary lines. The physical
invasion of salt water across property boundary lines would be a trespass, absent an agreement
amongst the owners of the mineral right to the affected parcels or an administrative order issued by
the Illinois Department of Natural Resources. Reed vs. Texas Co., 22 Ill.App.2d 131, 159 N.E.2d
651 (1959).
The law and conservation practices both recognize that it is in society’s best interest to
conserve natural resources and to produce them as effectively and efficiently, as is reasonably
possible 765 ILCS 525/1. Oil and gas are found in reservoirs, which are common sources of
supply, that do not recognize boundary lines. The primary production only produces a relatively
small fraction of the total recoverable reserves. It may be necessary to re-pressurize the formation,
through the use of the injection of salt water or gas or some other medium, in order to recover more
oil than would otherwise be recovered, if each lease were operated independently Carter Oil Co.
vs. Dees, 340 Ill.App. 449, 92 N.E.2d 519 (1950).
The need for a co-ordinated, unified effort has given rise to the administrative and legal
process of known as “unitization” whereby leases and multiple drilling units are effectively
combined and operated as one. Each lease or tract is assigned a “participation factor”, being the
fractional percentage of oil produced from the unit, which the owners of the mineral interest in that
particular tract are entitled to. Unitization recognizes that tracts may contribute to the production
of the unit as a whole, regardless of the precise location of where the oil is actually produced or
recovered.
To illustrate, it may be necessary to inject salt water in a particular pattern or method, in order
to drive or sweep oil towards other well bores, where it can be produced. The tracts where the
injection takes place, share in the oil produced, despite the fact that it is being produced from a well
bore located on another lease or tract.
Unitization can be accomplished by mutual agreement of all parties involved, whereby all
the parties consent. This consent may be granted in the original lease or a subsequent agreement.
Alternatively it can be ordered by the Illinois Department of Natural Resources pursuant to a petition,
provided consent has been obtained by at least a majority of the mineral interest owner involved 62
Ill. Admin. Code, Part 240.133.
In most instances, a unitization agreement will be necessary to state the parties’ relative rights
and obligations. The unitization agreement does not supercede the underlying leases, rather it
overlays them. In the event the unit is dissolved, the underlying leases may remain intact.
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There are numerous advantages to unitization, particularly in secondary recovery efforts.
When leases have been unitized, the spacing rules do not apply. The operator can drill wells
anywhere within the unit, provided it is the required distance from the external boundary of the unit.
Wells may be drilled on, or near internal property boundary lines. The operator does not have to be
concerned with displacing or draining oil or accounting for it separately. The reservoir may be
flooded with saltwater or re-pressured with gas. Oil may be produced and a development plan
adopted, based upon scientific, geological factors, which have nothing to do with surface boundaries.
Production proceeds are divided according to a formula utilizing tract participation factors.
Unitization is becoming more and more prominent in areas where the primary recovery has
been exhausted and reservoir pressure has been depleted. New and more intense methods of
secondary recovery are being proposed. A certain amount of oil adheres to, or sticks to the rock in
a formation on a molecular level. Methods of tertiary recovery are being proposed, in which a
polymer is introduced into the formation, to essentially wash the oil from the formation. These
agents break that chemical bond and allow the oil to be released and produced.
Furthermore, recent technological advancements are allowing operators to drill horizontal
wells, which may produce from multiple leaseholds. Special drilling units may be formed for such
purposes. Unitization can occur on a formation by formation basis. It need not include the entire
cross section of the property. Depleted formations may be unitized for purposes of secondary
recovery, while undeveloped strata may remain separate.
The Illinois Department of Natural Resources has extensive rules and regulations pertaining
to unitization and the requirements necessary to compel same, in the event all mineral owners do not
consent. The rules set forth the elements that must be both pled and proven in order to compel
unitization (See 62 Ill. Admin. Code Part 240.133).
Similar to pooling, itt is important to keep in mind that unitization may extend the lease, as
production anywhere within the unit, is treated as production from each lease comprising the unit.
Absent a Pugh Clause, production from the unit, holds all of the underlying leases, including tracts
located outside the unit. Shelton vs. Andres, 122 Ill.App.3d 108 (1984) and Ego Oil Co., Inc. vs.
Garner, 115 Ill.App.3d 82 (1983).
After Acquired Title
The after acquired title clause acts as a sort of dragnet, to convey or pass along title which
is acquired by the lessor, after the lease has been executed, thus avoiding the difficulty of having to
enter into a new lease for a subsequently discovered or acquired interest. At the time a lease is
executed, the ownership of the mineral rights may not be completely apparent. The lessor may later
acquire additional rights he or she did not have at the time the lease was entered into. For practical
reasons it may be easier for the lessor to acquire those rights, than for the lessee to attempt to lease
them from a third party, after oil has been found. This clause could apply where a surface owner
who only owns part of the minerals has entered into a lease and then recovers all or a portion of the
severed minerals pursuant to the Severed Mineral Interest Act, 765 ILCS 515/1 et. seq.
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Mother Hubbard Clause
The Mother Hubbard Clause extends the lease to adjoining or contiguous acreage which is
owned by the lessor, but is not technically included within the legal description referred to above.
It is a sort of catch all provision, that may cure a failure to include adjacent property in the legal
description.
The Mother Hubbard Clause is not intended to include other large separate tracts which are
not referred to in the legal description. Instead, it is intended to cover property that ancillary or
incidental to the described premises. For example, if a property is only accessible by means of an
easement over adjacent premises then the lessee is likewise granted permission to use the easement
for ingress and egress to the leased property. Similarly, the lease applies to property that may added
through accretion as a result of the change of the course of a river or creek. It also applies to
property underlying surface easements which have been granted to the public for roadway purposes.
It covers property that the parties intended to include in the lease, though perhaps failed to mention
or accurately describe.
Delay Rent
The Delay Rental Clause allows the lessee to delay development upon payment of periodic
rental. The drill or pay provision may be supplemented by a subsidiary clause which permits the
lessee to avoid either by surrendering or releasing the lease, in whole or in part. The delay rental is
paid in lieu of royalty and is a method of extending the lease despite the lack of production. For this
reason it bears emphasis as the amount of rent paid may be rather small in comparison to the value
of the opportunity being forsaken.
Assignment Clause
The Assignment Clause permits a transfer by either party of their rights under the lease. The
clause also includes a provision requiring the lessee to notify the lessor of an assignment. The lessee
is not bound to honor any assignment, until such notice has been provided.
A lease may continue in existence for several years. Although a lessor may be satisfied with
an operator, they have no control over who the operations may be eventually transferred to. When
an Assignment takes place the assignor is released from future obligations and the assignee steps into
the shoes of the assignor. The Assignment operates as a sort of limited release of the assignor. The
Assignment does not otherwise enlarge or restrict the rights, duties and obligations of the parties.
In rare cases, a lease will include a provision whereby the lessor retains the right to consent
to an Assignment. Such provisions usually further provide that such consent will not be
unreasonably withheld. Most operators and lessees will not allow such a restriction to be included
in the lease and may require some additional concessions be made in order to do so as it restricts
their right to freely convey the leasehold.
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On the other hand, the lease will usually also include a provision regarding for the effect of
the lessor’s conveyance of all or part of the property being leased. Unless the deed or instrument of
conveyance otherwise provides, the royalty is split on a pro-rata basis according to the surficial
acreage included in the lease. Consequently, it does not matter whether the oil is produced on the
portion of the premises that was conveyed or the portion that was retained.
To illustrate, if 1/2of a 40 acre drilling unit was sold, then the royalty would be divided
equally between owners of each of the 20 acre tracts involved even though the well maybe located
entirely on one of the two tracts. This avoids having to erect separate tank batteries, if a portion of
the premises is sold after it has been leased. The point is that some thought should be given to this
apportionment in crafting the instrument of conveyance when property is sold. To avoid this result,
the grantor could simply reserve the mineral rights.
Force Majeure
The Force Majeure Clause extends the lease for certain circumstances beyond the lessee’s
control. Such provisions are commonplace in contracts of many types and extremely common in oil
and gas leases. Some provisions are extremely broad and apply to circumstances such as inability
to obtain a favorable market or other circumstances which may or could involve some discretion on
the part of the lessee. It is in the lessor’s best interest to avoid those types of open ended, broad
Force Majeure Clauses and attempt to limit them to matters which are really truly are beyond the
control of the lessee.
This clause may also apply where governmental regulation or action prohibits the lessee from
performing. This has not been a great concern in the past, but the State’s consideration of a ban on
high volume hydraulic fracturing makes it more of a current concern. One question that exists is
what if the lessees preferred course of development has been prohibited but not its only method. It
is submitted that in such cases the time ought not be extended.
Warranty Of Title
The Warranty Clause includes the lessor’s covenant or warranty of title and usually also
includes the right of the lessee to pay the lessors’ taxes or mortgages in the event of a default. The
paragraph may include a “lesser interest clause” providing for a proportionate reduction of rentals
and royalties, if the lessor owns less than the entire mineral interest in the property which is subject
to the lease.
When representing a Lessor, I recommend that the warranty of title provision be deleted. The
Lessee/Operator must prove up title to the leasehold and the resulting oil that is produced when it
is marketed to the pipeline. The Lessee acquires whatever interest the Lessor has, whether it is more
or less than originally believed. The lease also usually includes an after acquired title clause.
Therefore the warranty of title provision is, in my opinion, unnecessary.
The burden of establishing title is more appropriately on the Lessee/Operator than the
Lessor/Royalty Owner. It is part of the due diligence involved in undertaking the project. The lessor
should not bear the cost of defending his or her title.
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Some leases have a limited Warranty of Title, whereby the lessor warrants only that they
have not encumbered the title while they own the property or that there is no other lease in effect or
wells currently producing on the property or properties that the leased premises are pooled with.
Although a lessor would prefer to avoid any type of warranty whatsoever, these limited warranties
are more acceptable than the broad covenant or warranty of title.
Surrender
The surrender clause relieves the lessee of its obligations by surrendering the lease or a
portion thereof. It also affords the lessee the right to remove equipment and other personal property
from the leasehold premises. If equipment is not timely removed, it may be considered to have been
abandoned. Abandonment is primarily a question of intent, but that is a subjective determination,
which ought to be avoided by promptly removing the equipment within the time allotted. It is
advisable to include a provision which requires the Lessee to remove all personal property and
equipment within 180 days of termination. Having reviewed the common express terms of a lease,
we now consider the covenants which the law implies.
Special Conditions and
Express Operating Clauses Regarding Use of the Surface
A lease typically includes several clauses regarding payment for crop damages, location of
roads and tank batteries, burying of pipelines below plow depth, use of oil, gas and water in repressurizing operations etc. Some of these operational clauses are no longer relevant and should
probably be omitted. Others, which are outlined below remain important and may help establish
credibility and good will with reluctant landowners.
These issues are perhaps best dealt with in an addendum to the lease, where the rights and
obligations of the parties can be set forth in detail. Since these covenants are binding on the operator
the addendum should be signed by both parties and incorporated into the lease. The addendum may
also incorporate the Rules and Regulations of IDNR so that they may be enforced as a matter of
contract. The Appendix includes an Exhibit which addresses those concerns in further detail.
Implied Covenants
Duty to Act as Reasonably Prudent Operator
Certain obligations are implied into an oil and gas lease as a matter of law, notably the lessee
owes the lessor a duty to act as a “reasonably prudent operator”. The duty of reasonably prudent
operations varies by circumstances and includes certain other duties such as the duty to prevent
drainage, to continue development, to market the oil produced, and or engage in secondary recovery
efforts.
In most cases the lease expressly grants the lessee the right to inject or recycle salt water or
gas in order to maintain or increase reservoir pressure in connection with secondary recovery
operations. In the absence of such a provision, 765 ILCS 525/1, the Oil and Gas Recovery Act
recognizes the benefits of secondary recovery and in pertinent part provides as follows:
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“It is hereby declared to be the law of the State of Illinois that the grant in an oil and gas lease
or contract to a lessee or operator of the right or power, in substance, to explore for and
remove all oil and gas from any lands in the State of Illinois, in the absence of an express
provision to the contrary therein contained, includes the right of the lessee, or his heirs or
assigns, to do what a prudent operator using reasonable diligence, would do having in mind
the best interests of the lessor and lessee, in producing and removing oil and gas, and
includes the use of practices and methods employed by the oil and gas industry, including
the injection of air, gas, water and other fluids into the productive formations or strata, and
cycling and recycling of gas, when done upon the authority of and under the rules,
regulations and orders of the Department of Natural Resources.” (Emphasis Supplied)
See also: Reed vs. Texas Company, 22 Ill.App.2d 131, (1959)
This duty of course must be adjudged from the totality of the circumstances. The implied
obligation upon lessee, is to use reasonable diligence to develop the leased premises. The lessee’s
duty must take into account both parties’ perspectives. The lessee is not required to operate at a loss,
solely in order to produce revenue for the royalty owner. The duty to act as recently prudent operator
takes into consideration, both the rights of the lessor and the lessee. The lessee/operator is not
required to undertake operations which would result in a net loss or be unprofitable Ramsey v
Carter Oil Co., 74 F. Supp. 481 (1947).
Duty to Protect Against Drainage
The duty to act in a reasonably prudent manner, in light of the present circumstances includes
a duty to protect against drainage. Production from an off setting well on adjoining acreage
producing from a common source or supply. The potential drainage that may result, is the particular
circumstance presented. If drilling an offset well is the action that a reasonably prudent operator
would undertake, then the operator thus has a duty to the royalty owners, to drill a well, to protect
the leasehold from drainage.
The relationship between the lessor and lessee and the duty which arises therefrom has its
limits. What is reasonable depends upon the circumstances of each case. Moreover, the duty to act
as a reasonably prudent operator is a two sided coin. The operator has a right as well as a duty. As
stated above, the operator has a right/duty to engage in secondary recovery operations.
It is important to note that the duty to act as a reasonably prudent operator is measured only
with regards to the leasehold premises. The operation of adjoining leaseholds can present a conflict
of interest for an operator. For example, an operator may not want to incur the expense of drilling
an additional well, if they believe that the production can ultimately be obtained (i.e. the oil may be
effectively drained) from the leasehold premises by another existing well located on a different lease,
producing from that same source of supply or formation. Perhaps the operator owns more interest
in one lease than the other and would benefit more from producing it than drilling a new well.
The duty to act as a reasonably prudent operator may require the lessee to drill an offsetting
well in order to negate the drainage of the other well. There is nothing in Illinois law which prevents
an operator from operating adjoining acreage, but operators must acknowledge the potential conflict
of interest and adjust their behavior accordingly. The operator must do what is best for the owners
in the particular lease; not necessarily what is best for the operator in general, when viewing the field
as a whole.
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If drainage is likely or planned, then the leases should be unitized. The duty to protect
against drainage is altered in the event of unitization. There is a duty to prevent drainage between
units, but not amongst the leases comprising unit. In fact, drainage is the very point or objective of
unitization. The production is divided according to the tract participation factor regardless of where
it was produced.
Assignment of Working Interest
Despite ever increasing technological advancements, oil and gas exploration remains an
inexact science. Therefore, in most cases, the exploration company will subdivide its working
interest and sell it to third-party investors, to share in the expenses, thereby spreading the risk.
An investor contributes a given amount of capital towards the lease and the anticipated
project costs. In exchange, the investor receives an “assignment” of a fraction of the lessee’s
working interest. The assignment thus creates a form of co-tenancy between the assignor, and the
assignee. It essentially carves out a portion of the lessee’s working interest and conveys it to the
investor/assignee. This interest is referred to as an “undivided fractional working interest.”
It is undivided in the sense that the owners collectively possess the right to prospect for oil
and gas. However, it is fractional in the sense that the interest is a distinct, identifiable part of the
whole, which can be sold, transferred, and separately taxed and accounted for.
If the venture is successful and oil production results, the exploration company and the other
working interests owners enter into an “Operating Agreement” which provides inter alia, for the
sharing of expenses associated with completing, equipping, and operating the well. This agreement
may be oral or it may be in writing. It may be actual or it may be implied from the circumstances.
Typically, the expenses are divided amongst the working interest owners on a pro-rata basis.
The royalty owner is not a party to the Operating Agreement, since their interest is not
expense bearing. In the Operating Agreement, the exploration company usually reserves the right
to manage or operate the wells and is paid an administrative or supervision fee for doing so. Most
investors are not actively involved in the day to day operations. The investors are referred to as nonoperators or et als, while the oil or gas company is the operator.
Working interest owners bear normal operating expense in proportion to their respective
ownership interest (e.g. a 10% working interest owner, bears 10% of the normal operating expenses).
At this point, recollect that the royalty owner’s 1/8th interest is free and clear of all expenses. This
explains why an owner of 10% of the working interest, pays 10% of the normal operating costs, but
only receives 8.75% (i.e. 10% of 7/8ths) of the revenue.
Normal operating expenses include items such as pumping, electricity, supervision, and
minor repairs. Generally, gas wells are less labor and power intensive than oil wells. Unlike most
oil wells, the reservoir pressure alone is usually sufficient to drive gas to the surface. It is not
necessary to mechanically pump the well. Therefore, gas wells usually require less maintenance than
oil wells. However, some monitoring is required and a certain amount of routine maintenance is
necessary to keep the wells producing.
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Oil wells typically decline in production over time. Once the productivity of a well
diminishes, the operator may try to stimulate production by reworking or deepening the well.
Reworking expenses are new efforts undertaken to increase productivity of an old well. They are
not normal routine operating expenses.
Reworking expenses may include a variety of procedures such as acidizing a limestone
formation or fracturing a sandstone formation, in order to create porosity or channels in the rock
formation for the oil or gas to flow through. Before reworking a well, the operator must obtain the
consent of the other working interest owners. If the operator does, then each working interest owner
is responsible for their proportionate part of the expenses. If the operator does not, then he acts at
his own peril. The other working interest owners are not responsible for those expenses. The
operator must carry the non-consenting parties and hope to recoup the cost out of future production.
Although a non-operator/working interest owner is responsible for his or her proportionate
share of normal everyday operating expenses, they are not responsible for reworking expenses that
they did not consent to. The operator may proceed, but is limited to recouping the non-consenting
working interest owner’s share of the additional cost, out of future increases in production, resulting
from the efforts undertaken. If the efforts do not result in increased production, then there is nothing
to recoup the expenses from.
Whether the efforts undertaken had any significant positive effect and if so, the amount of
same may be a point of debate with the non-consenting owners. Consequently it is better to get
everyone on board beforehand and if not, to document the level of production before and afterwards.
This is not a concern of royalty owners.
Integration, Permissive Drilling & Forced Pooling
One question which often comes up when counseling mineral owners is what happens if the
landowner or mineral owner does not want to lease their property. Can they be forced to participate?
The answer depends upon the whether they own all or part of the minerals underlying or that may
be produced from the proposed drilling unit.
If they own all the minerals in the proposed unit, then their consent is required and the
property can not be developed without their consent. If not, then they can be forced to participate
or the property can be developed despite their lack of consent.
This is not a common occurrence when dealing with smaller drilling units, but may become
more common when dealing with the large units associated with horizontal drilling projects. In any
event the prospect of drainage should also be taken into consideration before a landowner refuses
to sign a lease. The following outline summarizes the Administrative and Statutory remedies
involved.
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I.
Integration - Integration is an administrative process with the Illinois Department of Natural
Resources to combine acreage or ownership of minerals in a drilling unit so as to permit
drilling despite the absence of leases with all parties.
A.
Oil & Gas Act - 225 ILCS 725/22.2 - 62 Ill. Adm. Code 240.132 et. seq.
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B.
Applies when 2 or more persons own interest in all or part of a
Proposed Drilling Unit and
No action has been filed under Permissive Drilling Statute - Oil and
Gas Rights Act (See II below).
The Statute provides for Admin Remedy/Action to compel or force
pooling, to allow drilling despite objections or refusal of some
mineral owners.
Integration is governed by IDNR rules.
Generally used for known, but unwilling owners.
However, may also apply to Unknown and Missing Owners.
This was the preferred remedy of operators who are confronted by
unwilling owners, due to the ability of the Department to assess
penalty (i.e. 100% - 300%), in excess of actual drilling and
completion cost.
Historically Drilling Units were 10, 20 or 40 acres, as per IDNR
spacing rules, but Horizontal Drilling Units may be much larger.
The Petition must list names of all persons who have not agreed to
integrate as disclosed by County records.
The Petition must also list addresses of Owners/Respondents on
Petition if known.
If the address of any person is unknown, then petition shall so state.
(See 62 Ill. Admin. Code, Sec 240.132 (a) (6)).
Petition must also include a statement that Petitioner has exercised
due diligence to locate each owner and made a bona fide effort made
to reach agreement.
Known, but unwilling owners are named and joined by regular
service.
Missing and/or unknown owners are joined by notice and publication.
Integration is normally ordered one location or spacing unit at a time.
According to IDNR, each drilling unit must be on a separate Petition,
but the Petitioner may consolidate the hearings.
(Note: By contrast the Permissive Drilling Action may be done one
lease at a time, rather than location by location).
Options for Respondent to Integration
1.
Lease - grant lease to Petitioner (Note: the Order of
integration may compel the owner to surrender a lease, on
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2.
3.
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II.
terms found to be fair, reasonable and customary. This option
is the option usually chosen by the Department, but there is no
follow up to see if the lease is actually executed. The Order
of integration should stand in lieu of a lease for purposes of
obtaining a drilling permit. The lease should be on the same
terms as the others).
Not Lease but, Consent and Participate - Owner must pay
share of cost and expense up front. No penalty.
Non-Consent - Owner does not pay share of cost and
expenses up front, but IDNR may assess penalty of 100300%.
Operator may recover or recoup drilling completion and
operating cost and penalty out of future production.
Non-consenting owner is not personally liable for cost if
amount recouped is insufficient to cover cost.
In event of integration, Owners are treated as Lessor 1/8 Royalty and
Lessee 7/8 working interest.
Unknown and missing owners are not available to exercise option, so
they must be carried and cost recouped out of production.
Penalty would probably not be imposed on unknown or missing
owners.
The Department schedules and conducts the hearings. Given its
current personnel and budgeting constraints, it is difficult to predict
when a hearing would be held and/or an Order entered. Hence this
may not be a real option for an operator when time is of the essence.
Permissive Drilling Statute
A.
Oil & Gas Rights Act - 765 ILCS 520/0.01 et. seq. Complaint filed in State Court
for permission to drill, notwithstanding lack of leases from all owners.
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Must have more than 1/2 of the mineral interest leased.
765 ILCS 520/3 - May also join parties who’s names are unknown.
Joinder and service by publication are in accordance with the Illinois
Code of Civil Procedure.
765 ILCS 520/4 - Defendants whether known or unknown,
summoned same as in other civil cases.
Summons same as other cases, 765 ILCS 5/2-413.
Generally serve missing persons by publication.
Heirs and legatees of the above - joined as “unknown owners” and
also served by publication.
No Lease - Working interest on that portion not granted to or owned
by Lessee.
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III.
Payment of oil proceeds made to owners after deduct proportionate
part of the cost of legal proceeding, drilling, completion, producing
and disposing of oil, gas, etc. 765 ILCS 520/7.
No penalty in excess of actual cost.
Not clear who funds are paid to if owner is missing, unknown.
If no one available to receive money, then pipeline will hold as
suspended funds subject to Lost and Abandoned Property Act.
Escheat to State eventually.
Severed Mineral Interest Act - A legal action filed in State Court to obtain a lease of
severed minerals owned by unknown and missing owners.
A.
Oil & Gas Rights Act - 765 ILCS 515-1 et. seq.
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Allows Operator to lease and develop property notwithstanding
inability to locate all owners of severed mineral interest.
Does not apply to known, unwilling owners.
Only apples to severed mineral interest.
Operator maintains all working interest.
Allows surface owner to claim interest by default if not claimed by
true owner.
Court appoints Trustee for unknown and missing owners.
Trustee reviews lease, reports to Court.
Court approves lease if it is found to be fair, reasonable and Lease is
substantially similar to other leases in same vicinity.
Trustee then enters into lease on behalf of unknown and missing
owners.
Trust account set up at local bank by Trustee.
Money from oil sale proceeds paid into trust account.
Expenses paid to Plaintiff/Operator.
This is the preferred remedy for unknown or missing owners of a
severed mineral interest, especially if there are no known but
unwilling owners.
If there are also known but unwilling owners, the operator will either
have to bring two separate actions or join the unknown and missing
owners under the Permissive Drilling Statute, in which event operator
will not have a lease on that interest and will have to carry that share.
The surface owner is deemed to be in constructive adverse possession
of the severed minerals owned by the unknown or missing owners
from the date of Judgment.
If the subject mineral interest is not claimed within 7 years by the true
owner, then the surface owner gets it, including the money held in the
bank Trust account.
The time period may be reduced to one year if the severance took
place more than 20 years ago.
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•
This presents an opportunity for the surface owner to reunite the
surface and the mineral estate, thus allowing the surface owner to
benefit from development and permit development despite the
existence of missing or unknown owners.
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APPENDIX
PAID UP OIL AND GAS LEASE
THIS AGREEMENT OR LEASE (“Lease”), is made and entered into this _____day of
_____________ 20___, and is by and between__________________, whose address
is_____________________________, hereinafter called Lessor (whether one or more), and
_________________whose address is ______________________, hereinafter called Lessee.
WITNESSETH:
1. GRANTING CLAUSE: That Lessor, for and in consideration of Ten Dollars, cash in
hand paid by Lessee, of the royalties herein provided, and of the agreements and covenants of Lessee
herein contained, the receipt and adequacy of which are hereby acknowledged, hereby grants, leases
and lets exclusively unto Lessee the land covered hereby “(Land”) for the purposes of investigating,
testing, exploring, prospecting, drilling (either horizontally, vertically, and/or directionally),
developing, operating, producing, marketing, storing, and transporting oil and gas along with all
hydrocarbon and non-hydrocarbon substances produced in association therewith. The term "oil" as
used herein includes without limitation condensate and all other liquid hydrocarbons. The term "gas"
as used herein includes without limitation helium, carbon dioxide, nitrogen, and all other commercial
gases, as well as hydrocarbon gases such as (but not limited to) casinghead gas and hydrogen sulfide
gas. coalbed methane gas, gob gas, and all natural gas originating, produced, or emitted from coal
formations or seams, and any related, associated, or adjacent rock material. Lessor further grants,
leases and lets exclusively unto Lessee the Land for the purposes of injecting and storing gas,
waters, other fluids, air and any other substances into all subsurface strata; conducting all types of
recovery operations; laying, repairing, relocating, and removing pipelines; storing leased substances
and oil and gas from other lands and properties; building, repairing, relocating, and removing roads,
bridges, tanks, power lines, pumps, telephone lines and any other structures and things to produce,
save, take care of, treat, process, store and transport oil and gas from other lands and properties and
other products manufactured therefrom; and together with such rights and easements in the Land
necessary, convenient or useful in Lessee's oil and gas operations on the Land and/or adjoining lands,
together with the right to transport through or over the Land any and all oil and gas produced by
Lessee, its successors or assigns, from other lands and/or properties, including without limitation the
right-of-way and easement to lay, construct, use, maintain, operate, change, replace and remove
pipeline or pipelines, tanks, pumps, and other such facilities for such transportation and with the
right to cross any adjacent or contiguous lands of Lessor by use of existing roads or otherwise in
order to have ingress and egress to and from the Land to carry out such purposes. The Land covered
hereby is located in Williamson County, Illinois and is described as follows, to wit:
See attached EXHIBIT “A” for complete legal descriptions of Lands leased herein.
33
For all purposes of this lease, the premises shall be deemed to contain___________, whether more
or less, which acreage figure may be relied upon by Lessee in calculating payments hereunder.
Notwithstanding the above specific description of the Land, it is nevertheless the intention of Lessor
and Lessee to include within this Lease, and Lessor does hereby grant, lease, and let all lands and/or
properties now owned or claimed or hereafter acquired by Lessor up to the boundaries of any
abutting landowners (including any vacancies), together with any and all of Lessor's interest in any
lands underlying lakes, streams, roads, easements and rights-of-way which cross or adjoin the Land,
including all land added thereto by accretion.
2. TERM: This lease shall be for a term of Five (5) years (hereinafter called the “primary
term”), from the date first written above, and for as long thereafter as oil or gas is produced or is
capable of being produced from the Land or lands with which the Land is pooled, consolidated, or
unitized hereunder, or for so long as Lessor is engaged in drilling operations or reworking operations
on the Land or on lands pooled, consolidated or unitized therewith, or for so long as this Lease is
continued in force by any other provision hereof. If Lessee’s operations hereunder are delayed or
interrupted as a result of any surface or mining operations affecting the Land or any portion thereof,
including any lands pooled, consolidated, or unitized therewith, such delay or interruption will
automatically extend the primary term of this Lease for a period of time equal to any such delay or
interruption.
3. ROYALTY: Lessee agrees to deliver to the credit of Lessor into the pipeline or storage
tanks to which the well or wells may be connected a one-eighth (1/8th) part of all oil produced and
saved from the Land, or, from time to time, at the option of Lessee, the market price at the well of
such one-eighth (1/8th) part of all oil produced and saved from the Land. On gas of whatsoever
nature or kind, liquid hydrocarbons and their respective constituent elements, casinghead gas or
other gaseous substances, produced from the Land, or lands or leases pooled, consolidated, or
unitized therewith (hereafter “Gas”), Lessee shall pay as royalty one-eighth (1/8th) of the net proceeds
from the sale of the Gas computed at the wellhead, provided that the net proceeds shall be
determined after deducting all post-production costs of the Gas, including without limitation all costs
related to gathering, transporting, dehydrating, compressing, processing, storing, marketing and
treating the Gas. Lessor shall pay a proportionate part of all ad valorem, excise, occupation,
depletion, privilege, license, severance, processing, production or other taxes now or hereafter levied,
assessed or charged on oil or gas produced from the Land. SHUT IN GAS CLAUSE: During any
period (whether before or after expiration of the primary term) when Gas is not being so sold or used,
the well or wells is/are shut-in, and there is no current production of oil or operations on the Land
(or lands with which all or a part of the Land is pooled, consolidated, or unitized) sufficient to keep
this Lease in force, Lessee shall pay or tender to the royalty owners a royalty of Seven Hundred Fifty
Dollars ($750.00) per year for each shut-in gas well, such payment or tender to be made on or before
the anniversary date of this Lease next ensuing after the expiration of ninety (90) days from the date
such well is shut-in and thereafter on the anniversary date of this Lease during the period such well
is shut-in. When such payment is made, it will be considered that gas is being produced within the
meaning of this Lease.
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4. CONTINUING OPERATIONS: If at expiration of the primary term no oil or gas
is being produced on the Land or on lands pooled, consolidated, or unitized therewith, but Lessee
is then engaged in drilling or reworking operations thereon (or on acreage pooled, consolidated,
or unitized therewith) this Lease shall remain in force so long as such operations or additional
operations (whether on the same well or on different wells successively) are commenced and
prosecuted with reasonable diligence with no cessation of more than one hundred twenty (120)
consecutive days and, if such operations or additional operations result in the production of oil
or gas, so long thereafter as any oil or gas is produced thereunder from the Land or on lands
pooled, consolidated, or unitized therewith. It is agreed, however, that no implied covenant shall
be read into this Lease requiring Lessee to drill or to continue drilling on the Land or on lands
pooled, consolidated, or unitized therewith, or fixing the measure of diligence therefore. Drilling
operations shall be deemed to commence when the first work, other than surveying or staking the
location, is done thereon.
5. POOLING CLAUSE: Lessee is hereby granted the right to pool or unitize this Lease,
the land covered by it, or any part thereof, with any other land, lease or leases or parts thereof, for
the production of oil, liquid hydrocarbons and all gases and their respective constituent products, or
any of them, pursuant to contract right under this Lease or pursuant to governmental authorization.
With the exception of a horizontal completion, without Lessor’s consent, no unit for the production
of oil shall embrace more than forty (40) acres, and no unit for pooled gas or condensate shall
embrace more than six hundred forty (640) acres, except in cases where it may be necessary or
convenient to conform a unit to survey subdivisions, such unit for oil, gas or condensate,
respectively, may vary by not more than plus or minus ten percent (10%); provided, however, that
if any Federal or State law, Executive order, rule or regulation shall prescribe a spacing pattern for
the development of the field or allocate a producing allowable acreage per well of larger area than
set forth herein, then such unit may embrace as much additional acreage as may be so prescribed or
as may be used in such allocated or allowable acreage. In instances of horizontal completion, Lessee
is granted the right to pool or unitize this Lease for production of oil, liquid hydrocarbons and all
gases and their respective constituent products to embrace a unit of no more than six hundred forty
(640) acres, which amount may be increased to the maximum acreage allowable under any current
or future Federal or State Law, Executive order, rule or regulation. Lessee shall execute in writing
an instrument identifying and describing the pooled declaration. Such units may be designated either
before or after the completion of wells. Drilling operations and production on any part of the pooled
acreage shall be treated as if such drilling operations were upon or such production was from the
land described in this Lease, whether the well or wells be located on the land covered by this Lease
or not. The entire acreage pooled into a unit shall be treated for all purposes, except the payment of
royalties on production from the pooled unit, as if it were included in this Lease. In lieu of the
royalties herein provided, Lessor shall receive on production from a unit so pooled only such portion
of the royalty stipulated herein as the amount of his acreage placed in the unit or his royalty interests
therein on an acreage basis bears to the total acreage so pooled in the particular unit involved.
Pooling in one or more instances shall not exhaust Lessee’s pooling rights hereunder, and Lessee
shall have the recurring right but not the obligation to revise any unit formed hereunder by expansion
or contraction or both, either before or after commencement of production, in order to conform to
the well spacing or density pattern prescribed or permitted by the governmental authority having
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jurisdiction, or to conform to any productive acreage determination made by such governmental
authority. In making such a revision, Lessee shall file of record a written declaration describing the
revised unit and stating the effective date of the revision. To the extent any portion of the Leased
Premises is included in or excluded from the unit by virtue of such revision, the proportion of unit
production on which royalties are payable hereunder shall thereafter be adjusted accordingly.
6. RIGHT TO USE GAS, OIL & WATER: Lessee shall, without cost, have the right to
use oil, gas and water produced from or stored on the Land for Lessee's operations, except that
Lessee shall not be entitled to use water from Lessor's domestic water well, and Lessee, when
requested in writing by any Lessor owning an interest in the surface of the Land, shall bury, if
reasonable and practical, all pipelines crossing cultivated lands off the well sites at a depth of at least
36 inches. Lessee agrees that no well shall be drilled within two hundred (200) feet of any occupied
residence located on the Land without the Lessor's consent. Lessee shall pay Lessor for all damages
directly and proximately caused by Lessee's operations on the Land.
7. ASSIGNABILITY, DIVISABILITY, ETC.: The rights and obligations of each party
hereunder may be assigned in whole or in part and the provisions hereof shall extend to each party’s
heirs, devisees, successors and assigns, but no change or division in the ownership of the Land or
royalties, however accomplished, shall operate to enlarge the obligations or diminish the rights of
Lessee hereunder; and no change or division in such ownership shall be binding on Lessee until
thirty (30) days after Lessee shall have been furnished with a certified copy of a valid recorded
instrument or instruments evidencing such change of ownership. In the event of the assignment
hereof in whole or in part, liability for breach of any obligation hereunder shall rest exclusively upon
the owner of the rights and obligations under this Lease, or portion thereof, who commits such
breach. In the event of the death of any person entitled to royalties hereunder, Lessee may pay or
tender such royalties to the credit of the deceased person until such time as Lessee has been furnished
with the proper evidence (I) of the appointment and qualification of an executor or an administrator
of the estate of such deceased person, or if there be none, then until Lessee is furnished satisfactory
evidence as to the heirs or devisees of the deceased person, and (ii) that all debts of the estate have
been paid. In the event of an assignment of this Lease as to a segregated portion of the Land, any
default in the royalty payment to one leasehold owner shall not affect the rights of any other
leasehold owner(s) hereunder. If the Land is now or shall hereafter be owned severally or in separate
tracts, the Land nevertheless shall be developed and operated under this one Lease, and all royalties
accruing hereunder shall be treated as an entirety and shall be divided between or among and paid
to such separate owners of the Land in the proportion that the acreage owned by each such separate
owner bears to the entire leased acreage.
8. SURRENDER/RELEASE OF LEASE: Lessee and its successors and assigns shall
have the right at any time to surrender this Lease, in whole or in part, to Lessor, or to Lessor's heirs,
successors and/or assigns, by delivering or mailing a release thereof to Lessor or to such heirs,
successors and/or assigns, or by placing a release thereof of record in the county or counties in which
the Land is situated; thereupon, Lessee shall be relieved of all obligations, expressed or implied,
under this Lease as to the acreage so surrendered, and thereafter the shut-in payments payable
hereunder shall be reduced in the proportion that the acreage reduced by said release or releases bears
to the entire leased acreage.
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9. SUSPENSION OF PAYMENT: Lessor agrees that if Lessee is advised of or receives
notice of an adverse claim or any defect in the title affecting the Land which could affect all or part
of any payments due hereunder, then at Lessee's sole discretion, and without liability to Lessor or
any other person or entity, may withhold payment and delivery of all Lessor's such payments or
production in kind hereunder, without interest or penalty, until such time as said adverse claim is
resolved or said title defect is cured by a final decree from a court of competent jurisdiction. In the
alternative, and again at Lessee’s sole discretion, Lessee may file an interpleader action and pay
Lessor's payments or production in kind as directed by a court of competent jurisdiction until such
time as said court determines and authorizes the proper distribution of said payments or payments
in kind to the parties involved. Lessor agrees that in no event shall Lessee's withholding of payments
or making payments as directed by a court of competent jurisdiction constitute a default by Lessee.
Lessor further agrees that Lessee shall in no event be liable for interest, conversion, penalty, or
wrongful withholding of such suspended payments or amounts. In the event of production
hereunder, Lessor agrees to execute a division order confirming his/her/its interest herein.
10. NOTICE OF BREACH: The breach by Lessee of any obligation arising hereunder
shall not work a forfeiture or termination of this Lease, cause a termination or reversion on the estate
created hereby, or be grounds for cancellation hereof, in whole or in part, unless Lessor shall notify
Lessee in writing of the specific facts being relied upon by Lessor in claiming a breach hereof, and
Lessee, if in default, shall have sixty (60) days after receipt of such notice in which to commence
actions to comply with the obligations imposed by virtue of this Lease, and if Lessee shall fail to do
so within such sixty (60) days’ period then Lessor shall have grounds for an appropriate action in a
court of competent jurisdiction or to pursue such remedy to which he/she/it may be entitled.
11. WARRANTY OF TITLE: Lessor hereby warrants and agrees to defend the title to the
Land against all persons and claims and agrees also that Lessee at its option may discharge any tax,
mortgage, or other lien or encumbrance upon the Land, either in whole or in part, and in the event
Lessee does so, it shall be subrogated to any such matter with the right to enforce the same and to
apply royalties accruing hereunder toward satisfying the same. Without impairment of Lessee's
rights under the above warranty, in the event of the failure of Lessor’s title, it is agreed that if Lessor
owns an interest in the oil or gas in or under the Land, less than the entire fee simple estate, then any
royalties, shut-in royalties, and/or other payment or bonus to be paid to Lessor shall be reduced
proportionately. Lessor agrees during the term of this Lease that Lessor will not grant a top lease
to any third party.
12. FORCE MAJURE: If Lessee is prevented or delayed from complying with any
expressed or implied covenant of this Lease, conducting drilling or reworking operations on the Land
or on lands pooled, consolidated, or unitized therewith, or producing oil or gas from the Land or
from lands pooled, consolidated or unitized therewith by reason of the scarcity of, or the inability
to obtain or use pipelines, equipment or material; explosions or accidents; breakage of or accident
to machinery, equipment, or lines; the inability to acquire, or delays in acquiring, at reasonable cost
and after the exercise of reasonable diligence, such servitudes, rights of way, permits, licenses,
approvals and authorizations by regulatory bodies as may be necessary in order that the obligations
assumed hereunder may be lawfully performed in the manner contemplated; any event of “force
37
majeure;” or because of any applicable law, order, rule, regulation or directive of any governmental
authority, agency or body, then while so prevented or delayed, Lessee's obligation to comply with
such covenant shall be suspended; Lessee shall not be liable in damages for failing to comply
therewith; and this Lease shall be extended while and for so long as Lessee is prevented or delayed
by any such cause from complying with any expressed or implied covenant of this Lease, conducting
drilling or reworking operations on, or producing oil or gas from, the Land or lands pooled,
consolidated, or unitized therewith; and the time while Lessee is so prevented or delayed shall not
be counted against Lessee, anything in this Lease to the contrary notwithstanding.
13. WAIVER OF HOMESTEAD: Lessor and the undersigned hereby release(s) and
relinquish(es) all rights of dower, courtesy, or other spousal interest and homestead in the Land,
insofar as said right of dower, courtesy, spousal interest or homestead may in any way affect the
purposes for which this Lease is made as recited herein.
14. OPTION: This Lease may, at Lessee’s option, be extended as to all or part of the Land
for an additional primary term of five (5) years commencing on the date that this Lease would have
expired but for the extension. Lessee may exercise this option to extend this Lease by paying or
tendering to Lessor an extension payment of $115.00 per net mineral acre for the Land then covered
by this Lease, as extended. Said extension payment is to be paid or tendered to Lessor at the last
known address of Lessor. If Lessee exercises this option, the primary term of this Lease as so
extended shall be considered to be continuous, commencing on the date of this Lease and continuing
from that date to the end of the additional or extended primary term. Lessor hereby grants any
extensions of this Lease without the necessity of executing an amendment to this Lease and without
the necessity of further action by either party.
15. BINDING ON SUCCESSORS: This Lease and all its terms and conditions shall
extend to and be binding on all successors in title and on all heirs and assigns of Lessor and Lessee.
This Lease shall be governed by the laws of the state in which the Land is situated without regard
to any conflict of law provisions. This Lease represents the entire agreement between the parties
regarding the subject matter hereof, and each party represents there are no other agreements, written
or oral, affecting such subject matter. Lessor agrees that this Lease shall not be recorded in full
unless required by law or legal process. Lessee can record a “short form” or “memorandum” of this
Lease, and Lessor and Lessee each agrees to cooperate in good faith in the process of preparing,
executing, and recording such document.
16. PUGH CLAUSE: Notwithstanding anything herein to the contrary, it is agreed that
should Lessee exercise its option to pool or combine any portion of the lands covered hereby with
other lands, lease or leases, as provided above, then operations conducted on or production from any
such pooled or consolidated unit or units shall continue this lease in force and effect after the primary
term as to that portion of the lands covered by this lease and included in such unit or units, but not
as to that portion of said lands covered by this lease and not included in any such unit or units. This
lease may be kept in force and effect as to the remainder of the lands covered hereby in any manner
elsewhere provided in this lease that is not inconsistent with this paragraph. When used herein
primary term shall refer to either the 5 year period of the initial primary term or 10 year period if
Lessee’s option to extend primary term referenced in paragraph 14 is exercised.
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IN WITNESSETH WHEREOF, this Lease is executed and effective on the date first
above written.
LESSOR:
_________________________________
ACKNOWLEDGMENT
STATE OF ILLINOIS
)
)
COUNTY OF___________ )
The foregoing instrument was acknowledged before me this ______ day of __________,
20_____, by___________________.
My Commission expires: _____________
____________________________
Notary Public
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EXHIBIT “B”
ADDENDUM TO OIL & GAS LEASE
IN THE EVENT THAT THE TERMS AND CONDITIONS SET FORTH IN THIS
EXHIBIT CONFLICT WITH THE OIL AND GAS LEASE TO WHICH THIS EXHIBIT
IS ATTACHED, THE TERMS AND CONDITIONS OF THIS EXHIBIT SHALL
GOVERN.
1.
Pursuant to the Oil and Gas Lease to which this Exhibit “B” is attached, Lessee has the
right of ingress and egress and to the use the leased lands (“Lands”) for oil and gas exploration,
development and production operations, including tank batteries and other production facilities
and the transportation of produced substances from the leasehold, and also the right to utilize the
existing roads and pipelines across portions of the Lands. As consideration for the use of the
access road and drill site/pad by Lessee, Lessee shall pay Lessor the following amounts:
A.
Initial Payment. As consideration for the use of any access roads to be
constructed by Lessee and for the drill pad or site associated with the drilling oil
and gas Wells (the “Well”) on the Lands together with any lands used for
production facilities or other necessary facilities as reasonably determined by
Lessee, Lessee shall pay as advance liquidated damages the initial one time sum
of $_______________ per acre to Lessor. In the event that more than one acre
is used by Lessee for a wellsite and related facilities, then Lessee shall pay the
Lessor for the fraction thereof so used. Said sum shall be paid prior to moving
a drilling rig onto the leased premises.
B.
Annual Payment. Lessor shall also pay Lessee, $___________ per acre, or
fractional portion thereof, annually for the Land being occupied and taken out of
production for as long as any well on the Lands is not abandoned and plugged ant
the surface restored.
C.
Additional Damages. If, by actions directly resulting from the operations of
Lessee there is damage to real or personal property upon the Lands which is not
associated with usual and customary operations, such as, (but not limited to),
damage to livestock, structures, buildings, fences, culverts, cement ditches,
irrigation systems, drainage tiles and natural water ways, such damage will be
repaired or replaced by Lessee at Lessee’s sole cost. If Lessee damages any
growing crops, improvements, or timber on the leased premises during
operations, then Lessee will pay the Lessors/owner(s) of same the actual damages
sustained. The actual damages shall be paid promptly upon ascertaining the
amount thereof. Payment shall be based on the cost of repairs to the damaged
improvement or in the case of crop damages, the estimated yield of the affected
area and market price of the crops or timber damaged. If the Lands are rented on
a crop share basis, the payment of damages shall likewise be divided on the same
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basis. In such event, Lessor shall be responsible for making any necessary
payments to the tenant farming the lands. In the event the Lands are rented on a
cash basis, the crop damages shall be paid directly by Lessee to the tenant. If the
parties are unable to agree on the amount of crop damages, said damages shall be
calculated in accordance with the provisions of Section 6 of the Drilling
Operations Act 65 ILCS 530/6 (A) (3).
D.
Power Lines and Pipelines. In addition to the foregoing, for each power line or
new pipeline installed by Lessee, Lessee shall pay to Lessor the sum of one dollar
per lineal foot for each such line. As regards buried lines, Lessee shall be
responsible for back filling, re-packing, re-seeding, and re-contouring the surface
so as not to interfere with Lessor’s agricultural operations. Unless otherwise
agreed upon by Lessor and Lessee, all pipelines, gathering systems and power
lines on the Lands shall be buried to a depth of at least three (3) feet below the
surface.
2.
Prior to drilling and the construction of any roads, pipelines, tank battery installations,
or installation of any other equipment on the leased premises, including fencing, cattleguards,
gates and culverts, Lessee shall consult with the Lessor as to the location and direction of same.
Lessee will locate the access roads in a mutually agreeable location. The intent of the parties is
to locate roads so as to generally run parallel with Lessor’s row crops and locate tank batteries
near public road ways, whenever reasonably practicable to do so. It is the intention of the parties
hereto to cause as little interference with existing farming or grazing operations on the leased
premises as reasonably possible.
3.
All operations by Lessee, or Lessee’s operator, hereunder shall be conducted (a) in a
diligent and workmanlike manner in accordance with the standard of reasonably prudent industry
practices in like operations, (b) in accordance with all material federal, state and local laws and
regulations concerning the same and (c) in compliance with all applicable rules and regulations
of the Illinois Department of Natural Resources.
4.
If, after the expiration of the primary term of this Lease; any production well located on
the leased premises becomes idle, such idle well has not had commercial production for the last
36 consecutive months and Lessee has not been prevented from conducting operations on such
idle well by reason of force majeure, then said well shall be considered to be abandoned. Upon
the abandonment of any well drilled on the leased premises, Lessee shall within one hundred
eighty (180) days (a) cause such well to be plugged in conformance with the rules and regulations
of the Illinois Department of Natural Resources, (b) reasonably restore the surface of the leased
premises used for said well to the condition which existed before the well was drilled, and (c)
exercise all reasonable diligence to cut the casing off at least 36 inches below the normal surface
of the leased premises, all at Lessee’s expense.
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5.
Lessee shall be responsible for acquiring all necessary permits, licenses, fees, etc. incident
to its operations on the Lands. Less will permit all wells in accordance with the rules and
regulations of the Illinois Department of Natural Resources, including but not limited to the
requirement of obtaining all necessary bonds for reclamation and damages as determined by the
Illinois Department of Natural Resources.
6.
Lessee shall be responsible and shall remain liable for any environmental contamination
on the subject lands which are caused by or through its operations. To the extent that any such
claims are asserted, Lessee will be responsible for any remediation required as provided by state
regulations. This assumption of liability, however, does not include any third-party operations
on the subject lands or any Lessor actions which could cause environmental problems or
damages, but is limited solely to the actions of Lessee. Lessee hereby agrees to indemnify and
holds Lessor harmless from any and all environmental contamination or damages that Lessee
causes on the Lands. In addition, Lessee will indemnify and hold harmless Lessor from any
claims and demands of all other parties arising out of Lessee’s activities and operations on said
Lands.
7.
Lessor and Lessee hereby agree that water samples shall be taken on Lessor’s water wells
prior to drilling on the Lessor’s land. If damage occurs to Lessor’s water wells as a result of
Lessee’s activities and operations Lessee agrees to pay the expenses incurred which are necessary
to repair such well or wells. In addition, Lessor and Lessee hereby agree each may use an
independent laboratory or well driller to determine if damage has occurred to said wells.
8.
All oil and gas production shall be monitored by verifiable meters, or by other methods
acceptable to Lessee and Lessor, at such time as produced oil is trucked off location. The intent
is for all production to be accounted for and subsequent royalty payments to be based upon
documentable, or metered oil production.
9.
Any damage or destruction of field tile caused by Lessee’s operations in connection with
the drilling and producing of oil or gas on the leased premises shall be repaired and replaced by
the Lessee to the reasonable satisfaction of the Lessor and without cost to the Lessor.
10.
In the interest of protecting the surface of the leased premises, Lessee shall make itself
available to consult with Lessor throughout the pre-drilling, drilling, reworking, completion and
production stages as to methods for minimizing the impact of such operations on the surface of
the leased premises. Subject to the restrictions set forth herein, Lessee shall be accorded all the
rights and implied easements to access and use the surface for the purpose of oil and gas
development as granted by this Lease and applicable law. Lessee acknowledges that the leased
premises are used primarily for agricultural purposes and Lessee will make a diligent effort to
commence prospecting or commencement of drilling operations during times of dry weather.
In the event top soil as to the leased premises is removed for the construction of pits, trenches
or other operational excavations, the top soil shall be separated and set aside. Upon remediating
the excavation, the top soil should be replaced in the same manner as it was before it was
originally excavated. Before remediating, any excavation shall be allowed sufficient time to dry
before replacement of soil.
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11.
For any and all pits placed on the leased premises, Lessee shall conduct its operations in
a diligent and workman like manner, in accordance with the standard of prudent industry
practices in like operations, and in accordance with all material federal, state and local laws and
regulations concerning the same, including relevant rules and regulations of the Illinois
Department of Natural Resources, for establishing, maintaining and reclaiming such pits. No oil
based drilling mud shall be deposited in an unlined pit.
12.
As to all drilling operations and all operations conducted by the Lessee on the leased
premises, Lessee will be diligent to (a) keep the leased premises in a neat and orderly manner,
(b) not allow junk or refuse to accumulate on the premises and (c) follow industry practices for
weed abatement. Notwithstanding the foregoing, Lessee will only be held to the standard of
prudent industry practices in like operations, and in accordance with all federal, state and local
laws and regulations applicable to the matters discussed in the previous sentence.
13.
Lessee agrees to conduct its operations in such a reasonable manner, as to attempt to
minimize damages or prevent such operations from (a) causing or contributing to soil erosion or
to the injury of terraces or other soil-conserving structures on said leased premises; (b) polluting
the waters of reservoirs, springs, streams or wells upon the leased premises; (c) damaging crops,
timber, or pastures, consistent with the purpose of this Lease; or (d) harming the animals or
livestock owned by Lessor and kept or pastured on the leased premises. Said duty shall include
the erection and maintenance of fences, gates, and cattle guards where necessary for such
purposes, provided; however, Lessee will not be held to a higher standard than the established
standard of prudent industry practices in like operations, and the material federal, state and local
laws and regulations concerning the same.
14.
Lessee shall not utilize any well on the leased premises for salt water disposal or the
disposal of hydraulic fracturing fluids produced or recovered from lands other than the leased
premises or lands pooled therewith, without the express written consent of Lessor.
15.
Lessee acknowledges if portions of the leased premises are subject to and are currently
enrolled in the Conservation Reserve Program, or other similar set-a-side farm programs, with
the USDA Farm Service Agency (or other applicable agency), and the Lessor has received
payments under said program and the Agency requires Lessor to pay liquidated damages, a
penalty or refund any amounts received from said Agency under such program due to Lessee’s
operations under this Lease, then Lessee shall promptly reimburse the Lessor for all such
amounts. Lessee shall not be responsible for payment for any program not in effect upon the date
of execution hereof.
16.
When this Lease provides that Lessor and Lessee are to consult and agree as to operations
and the locations thereof, the following standards shall be utilized in determining the
reasonableness of Lessor’s and Lessee’s respective agreement, which agreement shall be subject
to good faith negotiations between the parties: (a) Whether the operations will materially
interfere with Lessor’s usual, historical, foreseeable and/or customary use of premises; (b)
Whether the operations are consistent with usual and customary oil and gas industry practices.
No well will be drilled within 500 feet of Lessor’s residence or within 350 feet of Lessor’s ponds.
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17.
If at the end of the primary term, a part but not all of the land covered by this lease, on
a surface acreage basis, is not included within a pooled unit or units in accordance with the other
provisions hereof, this lease shall terminate as to such part, or parts, of the land lying outside
such pooled unit or units, unless this lease is perpetuated as to such land outside such pooled unit
or units by operations conducted thereon or by the production therefrom of oil, liquid
hydrocarbons, gas or their respective constituent products, in accordance with the provisions
hereof. (Pugh Clause)
18.
Neither this lease nor a Memorandum thereof may be recorded until the bonus payment
has been received in full by Lessor.
IN WITNESS WHEREOF THE PARTIES HAVE SET THEIR HAND AND SEAL THIS
_______ DAY OF _____________ 20____.
LESSOR
LESSEE
__________________________
____________________________
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