How is Gas Lease Different from an Oil Lease

By | November 4, 2011

Even though the term oil and gas royalties is generally used for all the leases which enable oil and gas leases and royalties, both gas and oil leases differ from each other. There are few reasons for making the deals in a different way and let us know the things involved.

Unlike oil, gas is in gaseous state and is further liquified for transport. Moreover, it is used in the region where it is produced. For this, it has to be transported with the help of a network of pipelines. But, for gas, there are no local refineries as they are for the crude oil and hence it needs to be transported, the moment it is produced. For this, the company will arrange a huge network of pipelines before starting production. Hence the capital investment to move the gas from the point of production is quite high when compared to oil transportation to local and regional refineries.

Again the price for the natural gas produced at the well is determined by the gas sales contract whereas the market for gas is determined according to the season, need for the natural gas and liquified natural gas. This differs for the oil leases which are decided according to the market rate at that time.

Due to all these factors gas contracts became much shorter to avoid the fluctuations in the business and the changing prices of the gas. As gas is in vapor stage until it is liquified for transport, it becomes difficult to offer royalty for the gas. Many land owners prefer to have cash and credit for their royalty. And it is often advised to take cash, as the volatility of the gas is quite high. Gas royalty clauses usually state a royalty in market value. These are the reasons why the land owners tend to make different royalties for gas and oil production.