How Do Oil and Gas Leases Work in Texas?
Oil and gas play a critical role in Texas’ economy, and the agreements that govern exploration and production are just as important.
Oil and gas leases provide the legal basis for companies to access privately owned minerals, develop production, and allocate profits. Understanding how leases work allows landowners and operators to protect their financial and legal interests.
Texas law treats minerals as a separate form of property ownership, meaning surface owners may not always own the minerals beneath their land. Here at The Law Offices of Lance K. Bruun, our Texas oil and gas lawyer will be able to walk you through everything you need to know.
Defining an Oil and Gas Lease
An oil and gas lease is a legally binding agreement between a mineral owner and an oil and gas operator. This contract allows the operator to explore, drill, and produce oil and gas from the property in exchange for compensation to the mineral owner.
The lease defines the relationship between the parties, sets the payment terms, and outlines the operator’s rights and obligations. In Texas, these leases typically follow a standard format, but the specific terms vary depending on factors such as property location, geological potential, and current market conditions.
Key Parties Involved in Oil and Gas Leases
Oil and gas leases in Texas involve several important parties. Each has specific roles and responsibilities.
The primary parties include:
The mineral owner – This party owns the subsurface mineral rights and has the authority to lease those rights to oil and gas companies.
The operator – This party, usually an oil and gas company, acquires the right to explore and produce minerals under the lease terms.
Surface owner (if different from the mineral owner) – In Texas, surface ownership may be legally separated from mineral ownership. In these cases, operators still need to respect certain surface use rules, even if they hold a valid lease from the mineral owner.
By identifying these parties and understanding their relationships, both sides can avoid disputes during production.
Term Length and Primary vs. Secondary Term
Texas oil and gas leases generally have two distinct terms: the primary term and the secondary term. The primary term is a set period during which the operator must begin drilling or lose the lease. Most primary terms in Texas range from one to five years, though this can vary.
The secondary term begins only if the operator establishes production during the primary term. This term continues for as long as the lease remains productive. If production stops for any reason, the lease may automatically terminate, unless the parties include special provisions to extend it.
This two-term structure balances the interests of mineral owners and operators, allowing both sides to benefit from successful production while preventing unused leases from tying up mineral rights indefinitely.
Royalty Payments and Other Compensation
One of the most critical parts of any oil and gas lease is the royalty clause. This section defines how much the mineral owner receives from production.
In Texas, royalties are typically a percentage of gross production revenue, often ranging between 12.5% and 25%.
In addition to royalties, leases may include other compensation provisions, such as:
Bonus payments – Lump-sum payments made upfront when the lease is signed.
Delay rentals – Payments made if the operator has not started drilling within a specified time during the primary term.
Together, these payments provide financial benefits to the mineral owner while incentivizing operators to begin development promptly.
Surface Use and Surface Owner Rights
When the mineral owner and surface owner are different parties, oil and gas operations can create legal tension.
Texas law allows operators to use as much of the surface as reasonably necessary to produce the minerals. However, operators cannot cause unnecessary damage or interfere with existing surface uses.
Many leases contain surface use agreements to clarify each party’s rights. These agreements often address:
Placement of wells, pipelines, and access roads
Compensation for surface damages
Restrictions on certain activities near homes, livestock, or water sources
By addressing surface use upfront, operators and surface owners can reduce the risk of conflict during production.
Pooling and Unitization in Texas Leases
Pooling and unitization are contractual mechanisms that allow operators to combine adjacent leases into a single production unit. Pooling is more common and usually applies to smaller tracts that may not be large enough to support independent drilling.
Pooling clauses allow operators to satisfy lease obligations (such as drilling requirements) by drilling anywhere within the pooled area. Production from a pooled well counts toward the lease’s production obligations, and royalties are divided proportionally based on each tract’s contribution to the unit.
Unitization, which involves combining leases into larger units for enhanced recovery projects, is less common in Texas but still occurs in certain cases.
Implied Covenants in Texas Oil and Gas Leases
In addition to the written terms of the lease, Texas courts recognize several implied covenants that apply even if they are not explicitly stated. These implied covenants protect the mineral owner’s interest and require operators to act in good faith.
Common implied covenants include:
The covenant to develop – Requiring operators to pursue development after discovering oil and gas.
The covenant to protect against drainage – Requiring operators to protect leased property from drainage caused by wells on neighboring land.
The covenant to market – Requiring operators to sell produced oil and gas at a reasonable price within a reasonable time.
These implied covenants reflect Texas’ long history of balancing the interests of mineral owners and operators in oil and gas production.
Lease Termination and Reversion of Rights
Oil and gas leases do not last forever. Once production ceases and all lease terms expire, the lease terminates, and the mineral rights revert to the owner.
This process often happens automatically unless the lease contains specific provisions to extend the lease under certain conditions.
Common causes of termination include:
Expiration of the primary term without drilling activity
Cessation of production during the secondary term
Breach of key lease obligations
Understanding the conditions for lease termination helps both parties prepare for the end of the lease relationship.
Common Lease Provisions in Texas Oil and Gas Contracts
Every oil and gas lease is different, but most Texas leases contain a set of common provisions that address essential issues. These provisions include:
Granting clause – Defines the rights granted to the operator, including drilling, production, and transportation.
Habendum clause – Defines the primary and secondary terms.
Royalty clause – Explains how royalties are calculated and paid.
Pooling clause – Allows the operator to combine the lease with adjacent tracts.
Surface use clause – Defines the operator’s right to access and use the surface.
By understanding these provisions, both parties can better assess their rights and responsibilities under the lease.
Negotiating Fair Lease Terms
Although many oil and gas leases follow standard industry forms, mineral owners have the right to negotiate terms that fit their particular situation. These negotiations often focus on royalty rates, surface protections, and the length of the primary term.
Operators, on the other hand, want flexibility to develop the property efficiently while minimizing costs. Finding a fair balance requires both sides to communicate their goals clearly and document all agreed terms in the final lease.
Legal Requirements for Recording Leases
Texas law does not require oil and gas leases to be recorded with the county clerk, but recording offers important benefits for both parties. Recording creates a public record of the lease, which protects the operator’s right to develop the property and helps prevent future ownership disputes.
Most operators routinely record leases, and mineral owners should expect this step as part of the leasing process.
Environmental and Regulatory Compliance
Oil and gas production in Texas is subject to state and federal environmental laws, as well as regulations from the Texas Railroad Commission. These rules govern well spacing, water use, waste disposal, and environmental protection.
Lease provisions addressing regulatory compliance help both parties understand who will be responsible for following these laws during production.
Call Our Oil & Gas Law Attorney Today
By understanding how these leases work, mineral owners and operators can protect their rights, avoid disputes, and build successful business relationships. Lance K. Bruun is proud to serve businesses across Corpus Christi and the surrounding areas, including Sinton, Rockport, Alice, and Kingsville. Call The Law Offices of Lance K. Bruun today to get started.