Now that much of the new leasing has slowed down, many of our clients are being asked to sign a lease amendment. These people are already under a lease from many years ago. The trouble with an old lease is that they were written to accommodate shallower wells, as well as the way the oil and gas business operated thirty some years ago. The environment has changed dramatically since then, and it shouldn’t be surprising that the language in leases has, too. Energy companies therefore need to modify the terms of the old lease to allow them to economically drill new Utica wells.
Most frequently, the term of an old lease that needs changed has to do with unitization. Old leases will vary in their unitization limit, but it is a pretty safe bet to assume that they don’t allow for 1,280 acre drilling units that energy companies prefer today. Less frequently yet still common is an amendment to the landowner’s approval of assignment. Oil and gas leases are a lot like baseball cards: they can be sold and traded freely. This makes it easier to develop drilling units. If Company A is just 5 acres shy of its drilling unit, it can purchase the lease to that 5 acre parcel from Company B. Some old leases require that before a lease can be assigned to another company that the landowner must first approve of its assignment. This creates a burden for the company holding the lease and would slow down the development of drilling units. For this reason, energy companies ask for the term to be removed in an oil and gas lease amendment.
Typically there is no payment or bonus associated with signing a lease amendment. However, the landowner should be encouraged that their land is now much more amenable to drilling. The prospect of receiving good royalty money should be reassuring. Call us today if you have been offered a lease amendment and would like us to review it with you.