Options make great business sense for oil and gas companies but not so much for freehold mineral owners.

Option to Lease Agreements have become more widely used in Western Canada in recent years.  Freehold mineral owners are typically presented with a one page option agreement which provides an oil company or its land agent (the “optionee”) with the right to acquire a lease of the freeholder’s mineral rights at some future point in time.  The form of lease which the optionee may choose to execute is typically attached.  The consideration offered the freehold owner for signing the option generally ranges from $500 to $1,000 per quarter section.  The time period during which the option may be exercised is frequently set at a year but may be considerably longer.

To an oil company, options represent an exceedingly cheap way of securing a potential interest in oil or gas rights.  To a freeholder whose mineral rights have not been leased for years or whose lease rights have been tied up indefinitely with either a suspended gas well or a gas well producing minimal royalties, the $500 or $1,000 may seem like free money and the potential for a new lease with a more substantial bonus consideration may be tempting.

The problem is that the optionee invariably knows something that the freehold mineral owner doesn’t.  Before agreeing to an option, freeholders should review their technical circumstances and any lease agreements that are purportedly binding upon them.  Sometimes options make business sense for a freeholder but far more frequently option agreements expose the freeholder to being taken advantage.  FHOA can help you understand your technical and contractual circumstances and the potential risks associated with options.