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Spotting red flags in a gas and oil royalty contract

On Behalf of | Aug 31, 2023 | Royalty Disputes

Oil and gas production in Oklahoma is a bustling industry, with many landowners seeking to profit from the rich natural resources beneath their properties. According to the Energy Information Administration, profits hit an all-time high in Oklahoma in 2022, with production earning the state $1.5 billion.

If you hope to make money in the oil and gas industry, you may understand that entering into a royalty contract can provide a steady income stream for years to come. However, the complexity of these contracts and the potential for less-than-fair terms mean you may need some professional, trustworthy and experienced legal eyes to help you carefully scrutinize any agreement before signing.

Unclear or low royalty percentages

One of the most significant aspects of any royalty contract is the percentage of production profits you will receive. Be wary of contracts offering unusually low royalty percentages or those that do not clearly define these terms. It is essential to understand what percentage of the sales you will earn and ensure the figure is competitive.

Absence of a Pugh clause

A Pugh clause prevents the oil or gas company from holding non-producing parts of your land indefinitely. If your contract does not include a Pugh clause, the contract might restrict you from leasing the non-producing portions of your property to other companies.

No provision for shut-in royalty payments

When an oil or gas well becomes unproductive, the company might temporarily shut it down. During this shut-in period, you should still receive royalty payments. Do not sign a contract that does not provide for shut-in royalty payments.

Overly broad warranty clause

Be cautious of warranty clauses that make you responsible for problems that arise with the title to the property, even those predating your ownership. Such clauses can potentially expose you to significant liability.

Absence of an indemnification clause

An indemnification clause protects you from legal claims relating to the company’s operations on your land. It is a red flag if the contract does not have such a clause.

Understanding and identifying red flags in an oil and gas royalty contract can help you secure a fair deal, but they may be difficult to spot without plenty of experience. A professional’s knowledge is your best defense, and by seeking help in identifying these potential pitfalls, you can protect your rights and maximize your profits.