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Oil or Gas Lease Agreement

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Date: 2/5/2008

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Producers 88 (3/99) TX-Gen
Paid-up, Pooling


           This Lease Agreement is entered into this 17th day of July, 2006, (the "Effective Date") between Henry J. Janssen. Jr., as "Lessor," whether one or more, whose address is 484 FM 81, Runge, Texas 78151, and Penasco Petroleum, Inc., as "Lessee", whose address is 9801 Anderson Mill Rd., Suite 230, Austin, Texas 78750.

           In consideration of the sum of Ten Dollars ($10.00) and other valuable consideration, the receipt of which is acknowledged, and of the royalties and agreements of Lessee contained in this Lease, Lessor grants, leases, and lets exclusively to Lessee, its successors and assigns, all of the land described in this Lease, together with any reversionary rights of Lessor, for the purpose of exploring by geological, geophysical, and all other methods, and of drilling, producing and operating wells or mines for the recovery of oil, gas and other hydrocarbons, and all other minerals or substances, whether similar or dissimilar, that may be produced from any well or mine on the leased premises, including primary, secondary, tertiary, cycling, pressure maintenance methods of recovery, and all other methods, whether now known or unknown, with all related incidental rights, and to establish and utilize facilities for surface and subsurface disposal of salt water, and to construct, maintain and remove roadways, tanks, pipelines, electric power and telephone lines, power stations, machinery and structures thereon, to produce, store, transport, treat and remove all substances described above, and their products, together with the right of ingress and egress to and from the land subject to this Lease and across any other land now or later owned by Lessor. The land that is covered by and subject to this Lease is situated in Karnes County, Texas, and is described as follows and referred to in this Lease as the "land" or the "lands":

138 acres, more or less, described in the Oil and Gas Lease dated October 18, 1972, executed by Ema L. Janssen, et al, as Lessor, to Earl Scheig, as Lessee, recorded in Volume 417, Page 337 of the Deed Records of Karnes County, Texas, covering 138 acres out of the Charles A. Labazon Division of the Victor Blanco Four League Grant, A-3, Karnes County, Texas.


           This Lease covers all of the land described above, and in addition it covers and there is expressly leased, let, and demised to the same extent as if described above, all lands owned or claimed by Lessor adjacent, contiguous to or a part of the lands specifically described above, whether the additional lands are owned or claimed by deed, limitation or otherwise, and whether they arc inside or outside the stated description, whether they are held under fence by Lessor or not, and whether the additional lands are in the named survey or other survey or surveys. This is a Lease in gross and not by the acre and the bonus money paid shall be effective to cover all such lands irrespective of the number of acres they actually contained, and the lands included within the terms of this Lease are estimated to comprise 138 acres, whether they actually comprise more or less.

            1.    Term of Lease Without reference to the commencement, prosecution, or cessation at any time of drilling or other development operations, or to the discovery, development, or cessation at any time of production of oil, gas, or other minerals, and notwithstanding anything else contained in this Lease to the contrary, this Lease shall be for a term of 6 months from the date stated above (the "Primary Term") and as long thereafter as oil, gas, or other minerals are produced from the lands, or land with which the lands are pooled, or as long as this Lease is continued in effect as otherwise provided by the terms of this Lease.

           2.    Royalty The royalties to be paid by Lessee are: (a) on oil, and on other liquid hydrocarbons saved at the well, (3/16) of that produced and saved from the land, the same to be delivered at the wells or to the credit of Lessor in the pipeline to which the wells may be connected, Lessor's interest in either case shall bear its proportionate share of any expenses for treating oil to make it marketable as crude; (b) on gas, including casinghead gas or other gaseous substances produced from the land and sold on or off the premises, (3/16) of the net proceeds at the well received from the sale of gas, provided that on gas used off the premises or by Lessee in the manufacture of gasoline or other products, the royalty shall be the market value at the well of (N/A) of the gas so used, and as to all gas sold by Lessee under a written contract, the price received by'Lessee for that gas shall be conclusively presumed to be the net proceeds at the well or the market value at the well for the gas so sold; (c) on all other minerals mined and marketed, (N/A), either in kind or value at the well or mine at Lessee's election; and, (d) at any time and from time to time either at or after the expiration of the Primary Term of this Lease, if there is a gas well or wells on the land or lands pooled with the land subject to this Lease (and for purposes of this clause (e) the term "gas well" shall include wells capable of producing natural gas, condensate, distillate, or any gaseous substance and wells classified as gas wells by any governmental authority) and the well or wells are or have been shut-in before or after production, it shall be deemed that the well or wells are producing gas within the meaning of paragraph 1 and this Lease shall not terminate. In that event, Lessee covenants and agrees to pay, as royalty, shut-in gas royalty in the amount of Fifty Dollars ($50.00) per annum as long as the well or wells are shut-in and this Lease is not maintained in force or effect by any other of its provisions. The shut-in royalty shall be paid or tendered to Lessor or to Lessor's credit in the (Direct to lessor) Bank at ( ), which Bank or any successor Bank shall continue to be the agent for Lessor and Lessor's successors and assigns. Should Lessee elect, that Bank may also be used to be paid any other sums, including royalties due under this Lease. If that Bank (or any successor Bank) should fail liquidate, or be succeeded by another Bank, or for any reason fail or refuse to accept shut-in royalty or any other payment, Lessee shall not be held in default until thirty (30) days after Lessor shall deliver to Lessee a recordable instrument making provision for another method of payment or tender. Any depository change is a liability of the. Lessor. Any payment or tender of shut-in royalty made under the terms of this Lease may be made by check or draft of Lessee mailed or delivered to the Bank or to Lessor. In the event Lessee is obligated to pay the shut-in royalty indicated, the first payment of shut-in royalty shall be due and payable on or before ninety (90) days following the date on which the well is shut-in, or if shut-in during the Primary Term then on or before ninety (90) days following the expiration of the Primary Term, and subsequent payments, if required under the terms of this paragraph shall be due and payable annually on or before the anniversary of the date of the original payment.



            It is specifically provided that this is a Paid-Up Lease during the term set out above as the "Primary Term" and there shall be no obligations or liability on the Lessee to make any shut-in royalty payment or other payment during the Primary Term, and without any other payment this Lease shall remain in full force and effect during the Primary Term. The obligation to pay the shut-in royalty provided for above shall be a covenant running with the land, and under no conditions shall the failure to comply with this obligation serve or be used to terminate this Lease or to work any forfeiture of rights granted to the Lessee.

           3.    Operations If at the expiration of the Primary Term of this Lease, oil, gas, or other minerals are not being produced from the lands or land pooled with the lands subject to this Lease, but Lessee is then engaged in drilling or reworking operations, this Lease shall remain in force so long as drilling or reworking operations, are prosecuted (whether on the same or different wells) with no cessation of more than sixty (60) consecutive days, and if they result in production, so long thereafter oil, gas, or other minerals are produced from the lands or land pooled with the lands subject to this Lease. If production of oil, gas, or

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