What are the risks of an oil or gas lease on farm or ranch land?

Ranch or farm land sometimes needs to sit fallow to allow the soil to rest. Both nutrient depletion and pests may cause downturns in agricultural production or a specific farm or ranch operation. Therefore, those trying to make a living off the land in Texas are often eager to diversify their income streams as much as possible.

One of the ways to turn vacant or unused land into a stream of revenues is to sign an oil or gas lease. In theory, there can be money involved even when there are no operating wells on the property. However, many agricultural professionals question the viability of oil and gas leases because of the risk to their land. Despite reservations, estimates indicate that over a third of agricultural land is near shale oil operations.

How could an oil and gas lease especially affect ranch or farm operations negatively?

Through the possibility of contamination

If there turns out to be substantial oil or gas reserves, the installation of a well that would mean a lot of vehicle traffic on and off the property. In some cases, the lease might include provisions that result in the company getting an easement that affects the value of the property in the future.

As if that weren’t bad enough, those vehicles and the well itself create a risk of chemical contamination. If oil extraction equipment malfunctions or if vehicles experience some kind of collision that results in a spill, chemical contamination could leave the affected land unusable for years to come and drastically diminish the resale value of the property. In some cases, contamination risks are more extreme because mineral deposits may be quite close to freshwater sources on the property.

Both the possibility of chemical contamination and the impact of easements from oil and gas companies could diminish the value of the property from an operational standpoint and also if someone intends to list the property for sale. Thankfully, it is possible in many cases to negotiate an oil or gas lease that does not include unfavorable terms.

Those contemplating an oil or gas lease on agricultural property, whether they raise livestock or grow crops, will likely require support while reviewing and negotiating a proposed lease. Identifying and addressing risk factors associated with oil and gas operations in Texas may help ranchers and farmers better protect the property in which they have invested so much.