Described below is a way for a landowner to ‘grade’ his/her oil and gas (especially a sha
le gas) Lease and give yourself a Report Card on that Lease. The Grading is anywhere from an A (fantastic Lease terms for the landowner!) to an F (not so good Lease terms for the landowner and a failure).
The attached do-it-youself (DIY) check the box Report Card Form and simple grade calculation is described as a Lease-O-Meter – measuring your oil and gas lease to determine how friendly it is toward you, the landowner.
This Report Card is an easy and quick way to determine if the oil and gas lease you have (or are negotiating) contains terms beneficial to the landowner as compared to being more beneficial to the Oil Company.
Instructions for determining what your Report Card grade is, follows:
- There are 53 Subject questions with two possible answers – one favoring the Oil Company the other favoring the landowner, categorized into three broad Subject categories: Operating – Miscellaneous – Environmental (the categories are identified in Column A of the attached Report Card Table. Column B contains Subject questions).
- Read each Subject question in Column B and then decide how it is best answered by Column C or Column E. Column C is the answer more favorable to the Oil Company. Column E is the answer more favorable to the landowner. Pick the most appropriate answer that applies to the specific terms of your Lease (and not what you would like it to be). It is ok to have your advisor, lawyer or land manager help you answer the questions.
- If the more correct answer is Column C – a more favorable term for the Oil Company (place a 1 in Column D and place a 0 in Column F). If the more correct answer is Column E – a more favorable term for the land Owner (place a 1 in Column F and place a 0 in Column D). Place in Column G (your Grade) the appropriate ‘0’ or ‘1’ score answer from Column F. Note I have arbitrarily put 0’s in Column D of the Report Card Form and 1’s in Column F. You will need to adjust to your specific circumstance.
- Answer all 53 questions. There will be 53 entries in Column G (either a ‘0’ or a ‘1’).
- After answering all questions, add up all of the Column G scores and place the total answer at the bottom of Column G in the highlighted box next to the words: TOTAL REPORT CARD SCORE.
- The highest and most perfect score is 53 and the most favorable to the landowner.
- IF THE TOTAL REPORT CARD SCORE IS 48 TO 53, GIVE YOURSELF A LEASE REPORT CARD OF = A (most excellent)
- IF THE TOTAL REPORT CARD SCORE IS 42 TO 47, GIVE YOURSELF A LEASE REPORT CARD OF = B (good)
- IF THE TOTAL REPORT CARD SCORE IS 35 TO 41, GIVE YOURSELF A LEASE REPORT CARD OF = C (average)
- IF THE TOTAL REPORT CARD SCORE IS 20 TO 34, GIVE YOURSELF A LEASE REPORT CARD OF = D (needs improvement)
- IF THE TOTAL REPORT CARD SCORE IS 0 TO 19, GIVE YOURSELF A LEASE REPORT CARD OF = F (failing)
- If you get an A or B on your Report Card, then you can generally say that your Lease is fairly beneficial to you the landowner and contains terms and conditions generally to your favor. A reasonably balanced lease.
- If you get a C, then your Lease probably could use some amendments to make it more friendlier to you the landowner.
- If you get a D or F, then you probably require [significant] amendments to your Lease to bring it more in line with a more balanced and landowner friendly Lease. (In any event, an F is a failure and you are in need of some serious Lease redrafting. And the next time you negotiate a new Lease or extend or amend an existing one, you may wish to use or consult the author’s Model Oil and Gas Lease form, as that form is designed to provide high Lease-O-Meter Report Card scores.
The author recognizes that this Lease-O-Meter Report Card, while simple to use, does have its flaws. Flaws in that some of the subject questions deal with terms contained in any one particular Oil and Gas Lease which may be significantly more important than others. And that extra importance could cause the Grade to change significantly if that issue was given an adjusted rating. The author acknowledges that criticism, but in any event kept the same importance for all answers. The user of the Lease-O-Meter can make their own adjustments if they believe certain questions should be given more weight and importance.
The author believes this first of its kind Lease-O-Meter can be a useful and quick tool to assess an existing lease or early warning signs of new Lease terms are to the landowner’s best interest and provide some early warning signs or red-flags of Lease terms to be wary of. So next time you are asked to sign the Oil Company’s drafted standard Producer’s 88 lease form, you will have another tool to use to test how landowner friendly that lease will be.