Upstream Oil and Gas Exploration Leases
In upstream oil and gas exploration leases lesson, we discuss:
- Obtaining Lease Access
- The Lease
Learn More About Upstream Oil and Gas Exploration Leases With Oil 101
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Obtaining Lease Access
To obtain rights and access to explore for and develop oil and gas resources in most countries, an E&P operator must commit to spending millions of dollars upfront for line-miles of new seismic surveys, a number of drilled wells and front-end bonus payments.
No rational investor wants to make a large payment for a purchase whose quantity, quality, and longevity are largely unknown. However, that is essentially what is required of most E&P operators that seek to explore and develop in new areas, especially internationally.
To balance the risk, there are three basic operating models that can apply to the exploration activity. An oil company or E&P operator can gain access to the resources:
- On their own – by negotiating a specific agreement with the owner of the resources
- With a partner – using a Joint Operating Agreement (JOA)
- As a project is underway – using a form of agreement called a Farmout.
JOAs and farmouts are discussed in a subsequent lesson.
Learn About Oil & Gas Exploration JOA Farmouts With Oil 101
The Lease
In all countries except the US, the government owns the subsurface mineral resources. The forms of agreement to get access to these resources vary widely. In the US, the mineral lease form is a contract between the lessee and the lessor, or the owner of the mineral rights.
The E&P operator’s Land Department acquires the rights to develop US properties from the mineral owners. The Exploration Department usually negotiates international lease obligations once a concession is won.
The lease grants the operator the right to explore, drill for, extract, remove, and dispose of any oil or gas that may be found on the leased land. A well cannot be drilled legally unless an operator is a mineral owner or has a valid lease.
Leases are valid as long as annual rental payments are made. If oil and gas are discovered a royalty is paid to the mineral owner. The lease can be extended for as long as oil or gas are produced.
Mineral leasing of public land is competitive. There are a number of regional authorities that manage mineral leasing for US public lands:
- States administer any state trust lands.
- The US Bureau of Land Management administers public lands, including National Forest lands.
- The Bureau of Indian Affairs, administers Indian land, in cooperation with individual Indian Nations.
Related Resources:
What is the difference between Upstream and Downstream?
Drilling Wells for Oil and Gas and Offshore Drilling