Form PR4305 "Oil and Gas Lease" - Michigan

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OIL AND GAS LEASE
NO.
MICHIGAN DEPARTMENT OF NATURAL RESOURCES
DNR
By authority of Part 5, Section 502, 1994 Public Acts 451 as amended.
This Lease, made and entered into this
of
in the year ,
By and between the DIRECTOR OF THE DEPARTMENT OF NATURAL RESOURCES for the STATE OF
MICHIGAN, hereafter called “Lessor”, whose address is P.O. Box 30452, Lansing, Michigan 48909, and
, whose
address is , ,
, hereafter called “Lessee”.
Witness, that the State of Michigan is the owner of all rights of any oil and gas lying within or under any of the
land described below, and the Lessor has the authority to lease for the exploration, development, and production of
any existing oil and gas therein.
The Lessor, for and in consideration of a cash bonus paid to it, and of the covenants and agreements herein
contained on the part of the Lessee to be paid, kept and performed, does hereby lease, without warranty, expressed
or implied, unto the Lessee for the sole and only purpose of drilling, boring, and operating for oil and gas, and acquiring
possession of and selling the same, and for laying pipelines and building tanks, power stations, and structures thereon,
necessary to produce, save and take care of such products. No operations shall be conducted by the Lessee on any
of the following described land situated in the State of Michigan without obtaining all separate written permissions
required by the Lessor or any other State or Federal Government Agencies:
County
Parcels
Description
Section
Acres
Equity
Stipulations
None
Containing <LEASEACRES> net
1
acres, more or less
PR4305 (Rev. 02/26/2020)
OIL AND GAS LEASE
NO.
MICHIGAN DEPARTMENT OF NATURAL RESOURCES
DNR
By authority of Part 5, Section 502, 1994 Public Acts 451 as amended.
This Lease, made and entered into this
of
in the year ,
By and between the DIRECTOR OF THE DEPARTMENT OF NATURAL RESOURCES for the STATE OF
MICHIGAN, hereafter called “Lessor”, whose address is P.O. Box 30452, Lansing, Michigan 48909, and
, whose
address is , ,
, hereafter called “Lessee”.
Witness, that the State of Michigan is the owner of all rights of any oil and gas lying within or under any of the
land described below, and the Lessor has the authority to lease for the exploration, development, and production of
any existing oil and gas therein.
The Lessor, for and in consideration of a cash bonus paid to it, and of the covenants and agreements herein
contained on the part of the Lessee to be paid, kept and performed, does hereby lease, without warranty, expressed
or implied, unto the Lessee for the sole and only purpose of drilling, boring, and operating for oil and gas, and acquiring
possession of and selling the same, and for laying pipelines and building tanks, power stations, and structures thereon,
necessary to produce, save and take care of such products. No operations shall be conducted by the Lessee on any
of the following described land situated in the State of Michigan without obtaining all separate written permissions
required by the Lessor or any other State or Federal Government Agencies:
County
Parcels
Description
Section
Acres
Equity
Stipulations
None
Containing <LEASEACRES> net
1
acres, more or less
PR4305 (Rev. 02/26/2020)
A. DEFINITIONS
For the purposes of this Lease, the following definitions apply:
1.
“Actual drilling operations” shall mean and be defined as actual drilling and penetration of strata in a
continuous manner either by rotary, cable or combination drilling equipment to reach the objective
formation at the intended depth as specified by permit and shall include drilling, completing, reworking,
recompleting and deepening.
2.
“Commercially Producible Well” shall mean a well capable of production in paying quantities.
3.
“Commensurate royalties” means that amount of money which would fairly compensate the Lessor for
any royalties lost due to drainage of oil and/or gas from the leased premises.
4.
“EGLE” shall mean the Department of Environment, Great Lakes, and Energy.
5.
“Development Plan” shall mean a plan to minimize negative impacts to the surface and shall include, but
not be limited to, a complete copy of the proposed drilling permit application pursuant to 1996 AACS R
324.201, a copy of the request to install a surface facility or flowline pursuant to 1996 AACS R
324.504(4), and any supplemental Project Development maps, plans and Environmental Impact
Assessments (EIA) filed with the Supervisor of Wells. Additionally, identification of State-owned surface
lands within the proposed unit will be required. Documents filed with the Supervisor of Wells may need to
be supplemented to identify pipelines, drill sites, facility sites, roads, erosion control, and other measures
which may be necessary to mitigate impacts.
6.
“Development Unit” shall mean the larger of a) the Drilling Unit or b) the unit voluntarily pooled, for the
drilling of a single well.
7.
“Drilling Unit” shall mean an area prescribed by applicable spacing regulations for the granting of a permit
by the Supervisor of Wells for the drilling of a well.
8.
“Extension fee” means a surcharge payment by the Lessee for the privilege of extending the primary term
of the Lease for one (1) or two (2) years.
9.
“Gas” means a mixture of hydrocarbons and varying quantities of nonhydrocarbons in a gaseous state
which may or may not be associated with oil, including those liquids resulting from condensation,
including but not limited to natural gas and casinghead gas.
10.
“Gross Proceeds” means the total monies and other consideration accruing to an oil and gas Lessee for
the disposition of the oil, gas, or plant products produced. Gross proceeds includes, but is not limited to,
payments to the Lessee for certain services such as compression, dehydration, measurement, and/or
gathering which the Lessee is obligated to perform at no cost to the Lessor to place lease products in
marketable condition. Where lease products are sold to an affiliated person or entity, gross proceeds
are equivalent to the gross proceeds derived from, or paid under, comparable arm's-length contracts for
purchases, sales, or other dispositions of like-quality lease products from the same field or area. In
evaluating the comparability of arm's-length contracts for purposes of this Lease, the following factors
shall be considered: price, time of execution, duration, market or markets served, terms, quality, volume,
posted prices, prices received for arm’s-length spot sales, other reliable public sources of price or market
information, and such other factors as may be appropriate.
11.
“Lease Date” shall mean the date the Lease was made and entered into as shown on Page 1 of this
document.
12.
“Lease Issue Date” shall mean the date that the Lease is acknowledged by the Lessor as set forth on
Page 11 (signature page).
13.
“Lease Products” means any leased minerals attributable to, originating from, or allocated to this Lease.
14.
“Lessee” shall mean the person or entity who shall remain responsible for any and all covenants, express
or implied, contained within the Lease regardless of any partial interest assignments.
15.
“Marketable Condition” for gas means sufficiently free from impurities, except CO2, H2S and N2, and
otherwise in a condition that it will be accepted by a purchaser under a sales contract typical for the field or
area.
16.
“Marketable Condition” for oil means sufficiently free from impurities and otherwise in a condition that it
will be accepted by a purchaser under a sales contract typical for the field or area.
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PR4305 (Rev. 02/26/2020)
17.
“Oil” means natural crude oil or petroleum and other hydrocarbons, regardless of gravity, which are
produced at the well in liquid form by ordinary production methods and which are not the result of
condensation of gas after it leaves the underground reservoir, including but not limited to oil, casinghead
gasoline, drip gasoline and natural gasoline extracted from natural gas.
18.
“Paying quantities” shall mean a dollar amount sufficient to pay the day to day well operating costs and
for which a reasonably prudent operator would, for the purpose of making a profit and not merely for
speculation, continue to operate a well.
19.
“Production Unit” is a Drilling Unit, or Development Unit, or Uniform Spacing Plan and, if agreed to by the
Lessor, a Unitized Area, and consisting of one or more wells.
20.
“Reasonably prudent operator” shall mean an operator that operates to maximize economic return to both
Lessor and Lessee, taking into account market conditions, comparable production activities in the same
field or area and all applicable regulatory conditions.
21.
“Reclassification” shall mean the change of the classification in all, or a portion of, the lands contained
within the Lease from nondevelopment or development (including a subsection of development which
may contain restrictions) as deemed appropriate by the Lessor when the existing classification is
substantially in error or there is a change in circumstances subsequent to the Lease Date.
22.
“Reclassification fee” means a surcharge payment by the Lessee for the privilege of modifying all, or a
portion of, the existing classification of lands contained within the Lease.
23.
“Supervisor of Wells” shall mean the Director of the Department of Environment, Great Lakes, and Energy
or his/her designated representative.
24.
“Uniform Spacing Plan” (USP) shall mean a unit, as authorized by a Supervisor of Wells Order, such as
(A) 14-9-94 for the Antrim formation, which will provide flexibility in the placement of wells as intended in
Part 615 of 1994 PA 451, as amended.
25.
“Unitization Agreement” is an agreement to consolidate acreage into a Unitized Area for the allocation of
production on a basis as defined within the Agreement or Ratification as approved by the Lessor.
26.
“Unitized Area” is the leased lands within the boundaries defined in the Unitization Agreement, or
Ratification thereto, approved by the Lessor.
27.
“Working Interest in the Lease” shall mean one or more individuals or entities who have obtained, with
prior approval from the Lessor, an interest in the Lease to explore, develop, and produce the oil and/or
gas under the leased premises.
28.
“1994 PA 451, as amended” shall mean Act 451 of the Public Acts of 1994, as amended, and known as
the Natural Resources and Environmental Protection Act.
B. TERM OF LEASE
1.
Lease rights shall terminate and the Lessee shall be required to file a release with the Lessor as hereinafter
provided whenever any rentals coming due under the Lease shall be and remain unpaid for a period of
fifteen (15) calendar days after the rental becomes due.
2.
Unless terminated pursuant to B(1), it is agreed that this Lease shall remain in force for a primary term of
five (5) years from the Lease Date and as long thereafter as oil and/or gas are produced by the Lessee in
paying quantities from any Development Unit, Drilling Unit or, at the option of the Lessor a Production Unit,
but only as to the lands included in said unit.
3.
The Lessor agrees that it may grant to the Lessee an extension of the primary term of this Lease for not
more than two one-year extensions. Such extension to the sixth and seventh anniversaries of the Lease
Date--as to any or all of the lands leased hereby--will be considered upon written application by the Lessee
and payment of an extension fee, regardless of whether the Lessee is engaged in actual drilling operations
on any Development Unit or Drilling Unit containing lands leased hereby. The application must be
submitted not sooner than the fourth anniversary of the Lease Date. The amount of the extension fee shall
be established by the Lessor and the extension fee must be paid prior to the fifth anniversary of the Lease
Date for the first one-year extension and prior to the sixth anniversary of the Lease Date for the second one-
year extension. The extension fee established for the sixth year shall remain the same for the seventh year,
if executed. If, during the extended term, oil and/or gas is found in paying quantities, this Lease, insofar as it
affects lands for which an extension was granted, shall continue with like effect as if oil and gas had been
found within the primary term first set forth in paragraph B(2).
3
PR4305 (Rev. 02/26/2020)
4.
If the Lessee at the end of the fifth year of this Lease, or the first or second one-year extension granted
under B(3), is engaged in actual drilling operations with respect to any well or wells on any Development
Unit or Drilling Unit authorized which includes lands leased hereby, this Lease shall remain in force only on
the lands included in such Development Unit or Drilling Unit so long as the actual drilling operations on said
well(s) is diligently prosecuted to completion within one year from the start of drilling of said well. If oil and/or
gas is found in paying quantities upon completion of such well(s), this Lease, only insofar as it affects land
included within the said Development Unit or Drilling Unit, shall continue and be in force with like effect as if
such well or wells had been completed within the primary term first set forth in paragraph B(2).
5.
Notwithstanding anything to the contrary herein contained, actual drilling operations on or production from a
Development Unit or units established under the provisions of J(7) shall maintain this Lease in force beyond
the primary or extended term only as to land included in such unit or units. As to all other lands, this Lease
shall expire under its own terms.
6.
All applicable laws and rules are made a part and condition of this Lease. Violations of any of the applicable
laws shall be considered a violation of the terms of this Lease and the Lessor, at its sole discretion, may
invoke E(7), E(8), or E(9), or any combination thereof. No rules made after the approval of this Lease shall
operate to affect the term of the Lease, rate of royalty, rental, or acreage, unless agreed to by both parties.
C. ECONOMIC TERMS
1.
Rentals
The Lessee shall pay to the Lessor rental as follows:
a. The Lessee shall be required to make annual rental payments during each year of this Lease, it being
understood that the primary lease term commences on the Lease Date.
b. Rental for each year of the primary term shall be paid at the rate of $2.00 per acre per year. Should the
primary term of this Lease extend beyond the fifth year under provisions of Section B of this Lease, the
rental shall be paid at the rate of $3.00 per acre for the sixth year, and $4.00 per acre for the seventh year.
c. A minimum rental of $5.00 per year per Lease shall be paid by the Lessee on any Lease where rental
payment heretofore specified shall be less than that amount.
d. All rental, except for the first year of the Lease, shall be paid annually in advance of each anniversary of
the Lease Date. Rental for the first year of the Lease shall be paid in conjunction with and at the same
time as when Bonus payments are due.
e. The Lessor's receipt and deposit of a late rental payment shall not constitute a waiver of, or otherwise
affect, the Lease termination that shall automatically occur whenever any rental payment is unpaid for
a period of fifteen (15) calendar days or more after the anniversary of the Lease Date.
f.
Each and every oil and/or gas well, producing in paying quantities, and paying royalties to the Lessor, shall
abate the rental only on the leased premises situated within the established oil or gas Development Unit or
Drilling Unit. At the Lessor's option, rent may be abated in accordance with specific terms contained within
a Unitization Agreement which has been approved in writing by the Lessor. The abatement shall be
effective on the rental due date following the rental period in which the abatement is granted.
2.
Royalties
The Lessee shall pay to the Lessor royalties as follows:
a. The Lessee shall pay the Lessor a royalty equal to one-sixth (1/6) of the gross proceeds of sale of all oil
and/or gas produced and saved in any combination from the leased premises as further set forth below.
b. It is agreed that the Lessee is required to place lease products in marketable condition at no cost to the
Lessor. The value of gross proceeds shall be increased to the extent that the gross proceeds have
been reduced because the purchaser, or any other person, is providing certain services the cost of
which is the responsibility of the Lessee to place lease products in marketable condition.
c. At the sole option of the Lessor, and in lieu of royalty payments upon oil and/or gas produced and saved,
the Lessee shall deliver to the credit of the Lessor free of cost the equal one-sixth (1/6) part of all oil and/or
gas produced and saved under the terms of the Lease to facilities to which the wells may be connected.
d. If payments specified are not made on or before the twenty-fifth (25) day of the first month following oil
production sale or the second month following gas and/or plant products sale, the Lessor may claim
default under the provisions of Section E(1) herein. In addition to any remedies available to the Lessor
4
PR4305 (Rev. 02/26/2020)
under the Lease, payments made after the due date shall include interest at the rate of one and a half
percent (1.5%) per month, or at the maximum legal rate, whichever is less, on the amount of royalty
unpaid. A full month's interest will be charged for late payments received during any portion of the
month in which late payment is received.
e. Should oil be produced from any well, the gross proceeds of sale of lease products of such oil shall be
free to the Lessor of any cost to whichever point is first encountered: 1) the point of sale to an
independent nonaffiliated third party purchaser; or 2) to an affiliated purchaser, provided the sale is at
prevailing market rates; or 3) the point of entry into an independent nonaffiliated third party owned
pipeline system; or 4) the point of entry into an affiliate owned pipeline system, provided transportation
rates are at prevailing market rates. Upon request by the Lessor, written justification of charges made
by the Lessee must be submitted and agreed to in writing by the Lessor.
f.
Should gas, including casinghead gas, be produced and saved from any well, the gross proceeds of
sale of lease products of said gas shall be free to the Lessor of any cost to whichever point is first
encountered: 1) the point of entry into a facility to remove CO2, H2S, N2 or obtain plant products, or 2)
the point of entry into an independent nonaffiliated third party owned pipeline system; or 3) the point of
entry into a pipeline system owned by a gas distribution company, or any subsidiary of such gas
distribution company which is regulated by the Michigan Public Service Commission; or 4) the point of
entry into an affiliated pipeline system, if the rates charged by such pipeline system have been
approved by the Michigan Public Service Commission, or if the rates charged are reasonable, as
compared to independent pipeline systems, based on such pipeline system's location, distance, cost of
service and other pertinent factors. Upon request by the Lessor, written justification of charges made by
the Lessee must be submitted and agreed to in writing by the Lessor.
g. The Lessee agrees that all royalties accruing to the Lessor herein shall be without deduction of any
costs incurred by the Lessee except as agreed herein. The Lessor is not liable for any taxes incurred
by the Lessee and no deduction may be taken for any tax in computing the royalty. Lessor's royalty is
to be free and clear of all costs, claims, charges and expenses of any nature, including third party post
production costs on or off the premises except as herein provided, and except for the reasonable costs
of CO2, H2S and N2 removal, there shall be no deduction for the cost of gathering, separating,
dehydrating, compressing or treating the gas to make it marketable. Unless otherwise specifically
agreed in writing, there shall be no deduction for transportation costs prior to entry of gas into a pipeline
system as set forth in C.2f (2) through (4).
3.
Royalties for: Shut-in Wells and Wells Suspended from Operation
Within fifteen (15) calendar days after the anniversary of the Lease Date when a producing well is shut-in or
suspended from operation for a period greater than 180 continuous calendar days, the Lessee shall pay to
the Lessor, for each acre of the leased premises located within the established oil and/or gas Production
Unit, a sum equal to the rental rate applicable under the terms of C(1b). For each year thereafter, any shut-
in rate shall increase an additional $1.00 per acre per year. Such payment shall be deemed a royalty under
all provisions of this Lease.
D. TERMS FOR: SHUT-IN WELLS AND WELLS SUSPENDED FROM OPERATION
1.
If a commercially producible oil and/or gas well completed on the leased premises, or on acreage pooled or
consolidated with all or a portion of the leased premises into a Development Unit for the drilling or operation
of such well, but only to the extent that the leased premises are included in said Development Unit, is at any
time shut-in, or operations are suspended due to action taken by the Supervisor of Wells, and no oil and/or
gas therefrom is sold (or gas is used for the manufacture of gasoline or other products), subject to the
conditions of this Lease, such shut-in well or well suspended from operation shall be deemed to be a well on
the leased premises producing oil and/or gas in paying quantities, and this Lease shall continue in force
provided that within thirty (30) calendar days from the date the Lessor's written request is mailed, the
Lessee submits to the Lessor satisfactory documentation in support of the shut-in or suspended status.
2.
If an oil and/or gas well has been shut-in, or operations have been suspended by the Supervisor of Wells,
and shall remain shut-in or suspended for a period of thirty (30) calendar days due to conditions or
circumstances beyond control of the Lessee, the Lessee shall notify the Lessor in writing within fifteen (15)
calendar days thereof, and annually thereafter, stating the conditions or circumstances for the shut-in or
suspended status and expected date of resumption of production. The Lessee must be able to demonstrate
why the well is shut-in or suspended. In the event the Lessor shall determine, in its opinion, that such oil
and/or gas can be marketed, the Lessor shall give notice to the Lessee in writing and the Lessee shall have
thirty (30) calendar days from the date such notice is mailed in which to satisfy the Lessor. If the Lessee
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PR4305 (Rev. 02/26/2020)