Mineral rights often include the rights to any oil and natural gas that exist beneath a property. The rights to these commodities can be sold or leased to others. In most cases, oil and gas rights are leased. The lessee is usually uncertain if oil or gas will be found, so they generally prefer to pay a small amount for a lease rather than pay a larger amount to purchase. A lease gives the lessee a right to test the property by drilling and other methods. If drilling discovers oil or gas of marketable quantity and quality, it may be produced directly from the exploratory well.

To entice the property owner to commit to a lease, the lessee generally offers a lease payment (often called a “signing bonus”). This is an up-front payment to the owner for granting the lessee a right to explore the property for a limited period of time (usually a few months to a few years). If the lessee does not explore, or explores and does not find marketable oil or gas, then the lease expires and the lessee has no further rights. If the lessee finds oil or gas and begins production, a regular stream of royalty payments usually keeps the terms of the lease in force.

One problem that can occur is when the lessee discovers oil or gas but has no way to transport it to market. Some lease agreements have a “waiting on pipeline” clause that extends the lessee’s rights for a limited or indefinite period of time.

In addition to a signing bonus, most lease agreements require the lessee to pay the owner a share of the value of produced oil or gas. The customary royalty percentage is 12.5 percent or 1/8 of the value of the oil or gas at the wellhead. Some states have laws that require the owner be paid a minimum royalty (often 12.5 percent). However, owners who have highly desirable properties and highly developed negotiating skills can sometimes get 15 percent, 20 percent, 25 percent or more. When oil or natural gas is produced, the royalty payments can greatly exceed the amounts paid as a signing bonus.