Oil and gas leases in North Dakota: bonus, royalty and the clauses that matter

What a lease gives each side

An oil and gas lease is a contract that gives another party, usually an oil company, the right to explore for and produce oil and gas from your minerals. Montana State University's guide says mineral owners usually benefit in at least two ways: they keep a royalty on any production, and they're paid a bonus when the lease is signed. Rental payments and stipulations about how development will proceed can be negotiated on top of that.^[1]

North Dakota State University's leasing bulletin makes the same point from the owner's side. Leasing is basically a matter of negotiation, it says, and each lease is negotiated and agreed on individually.^[2] That bulletin dates from 2006, so we use it for how leases are put together and rely on the statutes, below, for what the law requires today.

The bonus

The bonus is the cash paid at signing, usually quoted in dollars per acre. NDSU's bulletin notes that the amount generally isn't written in the lease. The lease itself recites only a nominal consideration, “one dollar and other valuable considerations.” It also says competition for leases largely sets the bonus: the more intense the competition, the larger the bonus.^[2] Montana State's guide says the same about location. Owners next to proven wells face less risk than owners far from a producing area, and the terms offered reflect that.^[1]

Two practical points from the bulletin. A bonus quoted per acre can change after the company checks title, because the payment follows the acres you actually own, and a flat-sum bonus is the alternative where the company is fairly sure of the acreage. The bulletin also describes the sight draft, a payment instrument the company gets about 30 days to honor so it can recheck ownership, and the lease option, where the company pays a smaller amount to keep the right to lease while it checks title.^[2] Our guide on whether you own minerals covers how ownership gets checked.

The royalty

The royalty is your share of the value of what's produced. NDSU's bulletin calls the royalty clause economically the most important one for the owner. It says the standard royalty on oil and gas was one-eighth for many years, and that as North Dakota became a major oil producer, one-sixth, three-sixteenths and other fractions came into use to attract mineral owners.^[2] Montana State's guide adds that private leases can be negotiated higher or lower, that owners in proven areas are more likely to get a higher rate, and that one-eighth and 12.5 percent are the same thing.^[1]

The fraction is only half the question. The other half is what it's a fraction of. NDSU's bulletin says that if the lease is silent, the royalty is implied to be figured at the well, free of both production costs and the costs after production. If the lease fixes the royalty at the pipeline or the place of sale, costs of getting the product there, such as compression, may be shared.^[2] Montana State's guide says the same thing in plainer terms: a company can deduct some marketing costs when the product isn't salable at the wellhead, and the owner benefits from the lease spelling out which costs and how they're counted.^[1] How the North Dakota courts have read those clauses is covered in our royalty check deductions guide.

Both guides describe a way to reduce deductions through negotiation: an overriding or non-participating royalty on top of the lease royalty, which is paid from the company's share and is generally free of the costs of operation.^[2], [1]

Rentals, terms and held-by-production

A lease has a primary term, a set number of years in which drilling has to begin. In the NDSU bulletin's description, if drilling hasn't started, the lease ends unless the company pays the agreed delay rental on each anniversary. Once there's production, the lease moves into its secondary term, rentals stop and royalties are paid.^[2] Montana State notes that primary terms are often three or five years, that the secondary term runs “so long as oil or gas are produced in paying quantities” or similar words, and that paid-up leases, with no rentals at all, are becoming more common.^[1]

The clauses that stretch a lease are where most of the arguments come from. The NDSU bulletin lists drilling-operations, shut-in, dry-hole, cessation-of-production and force majeure provisions as ways the primary or secondary term can be extended by contract.^[2] Montana State's guide covers two clauses owners ask about. A Pugh clause lets the lease end, at the close of the primary term, on acreage outside the spacing unit of the producing well. Leasing by depth or a vertical Pugh clause can free a different formation.^[1] Spacing units are explained in our guide to spacing units and pooling.

What North Dakota law adds after you sign

Several statutes in chapter 47-16 protect a royalty owner, whatever the lease says.

• Payment deadline. Section 47-16-39.1 says that if the operator doesn't pay royalties within 150 days after the oil or gas is marketed, and cancellation isn't sought, the operator owes interest at 18 percent a year, without being asked. Late payment can also be grounds for cancelling the lease where the court finds the equities require it.^[3]
• Records. Under section 47-16-39.2, a royalty owner can send written notice and inspect and copy the production and royalty payment records. The notice has to name the lease, the period and the records wanted, and has to go to the address printed on the royalty statement.^[3]
• Division orders. Section 47-16-39.3 says royalty payments can't be withheld because an owner hasn't signed a division order, and a division order can't change the lease. If it varies from the lease, the lease terms control.^[3] Our division order guide goes through that in more detail.
• Cleaning up the record. When a recorded lease ends, section 47-16-36 puts the duty on the lessee to record a surrender within fifteen days, at no cost to the owner. If the lessee doesn't, the statute gives the owner a notice-and-affidavit process to put a satisfaction of lease on record.^[3]
• Notice of a lease's term. Section 47-16-40 says a recorded lease gives the public notice of its validity for the definite term stated, and no longer. If the lease has a contingency that can extend it, like production in paying quantities, the lessee may file an affidavit before the term ends showing the contingency happened.^[3]

These are summaries. The statutes have conditions and exceptions, such as the royalty rule's carve-outs for owners who take production in kind, title disputes and owners who can't be located, so use the text of the section for your own case.

Things to settle before you sign

Both extension guides recommend having an attorney who knows oil and gas leasing read the lease before it's signed.^[2], [1] Between them, they point to the same short list of terms to look at:

• what minerals and what land the lease covers, and whether it allows seismic work;
• the primary term, any extension option, and how a well started near the end of the term is treated;
• the royalty fraction and the point where it's calculated, what costs can come out, and what records you can see;
• rental, shut-in and dry-hole terms, and any Pugh or depth clause;
• whether the company can assign the lease and how you'd be told;
• surface use and damages, if you also own the surface.^[2], [1]

Montana State's guide adds two items that are easy to miss. If the property has a mortgage or other loan, the lender may have to be told about the lease and may be entitled to part of the royalty. And if the minerals are held by co-owners, it can help to reach agreement among them before leases are signed separately.^[1] Our guide to inherited minerals covers how interests end up shared.

Whether to lease at all

Montana State's guide says an owner isn't compelled to sign a lease. It also notes that, in North Dakota, forced pooling is allowed and used frequently, and that owners of small acreages who don't lease can be exposed to forced pooling.^[1] Some owners choose to sell the minerals instead, which the same guide lists as another option.^[1] The state production taxes that apply to the royalty are covered in our oil and gas taxes guide. To see how a lease turns into a check, read what a royalty is worth. The FAQ answers common questions about leases and royalty checks.

A note on our interest

Fort Union buys minerals and royalty interests, so we have a commercial interest in this subject. Nothing in this guide depends on selling to us, and each statement comes from a public source listed below. Our editorial standards explain how we source and review our pages. If you ever want to know what we'd pay for your interest, the offer page is the way to reach us.

Sources

These are the sources behind this guide, in the order we first cite them. We read the parts of each one that this guide relies on, on October 25, 2026.

1. Oil and Gas Leasing, MontGuide MT201209AG (reviewed January 2017) — Montana State University Extension, read October 25, 2026.
2. North Dakota Oil and Gas Leasing Considerations, Extension Bulletin 29 (revised October 2006) — North Dakota State University Extension, hosted by the North Dakota Department of Mineral Resources, read October 25, 2026.
3. N.D.C.C. chapter 47-16, Leases (sections 47-16-36 to 47-16-40) — North Dakota Legislative Branch, Century Code, read October 25, 2026.