Oil and gas leasing

The DNR’s authorization to enter contracts for the taking of coal, oil, gas and other mineral products from state-managed lands comes from section 324.502(3) of the Natural Resources and Environmental Protection Act, 1994 PA 451, as amended (NREPA).

The vast majority of state oil and gas leases originate at DNR oil and gas lease auctions, currently held biannually in Lansing. Parties interested in leasing state-owned oil and gas rights have the opportunity to “nominate” state-owned oil and gas rights (by parcel) prior to each auction. Interested parties may also apply for a direct lease under certain circumstances.

Parties interested in leasing state-owned oil and gas rights can request or “nominate” them for an oil and gas lease auction. The DNR director gives final approval of the parcels to be offered and the corresponding parcel classifications.

The oil and gas lease auctions are currently held twice per year – once in the spring and once in the fall. The DNR has been leasing state-owned oil and gas rights through the public auction process since 1929. 

The oil and gas lease auctions are for the privilege of leasing state-owned oil and gas rights. The state is not selling the mineral or oil and gas rights at these auctions.

Yes. However, a state of Michigan oil and gas lease is not a transfer of ownership and will expire after its five-year primary term if the lease is not included in a producing unit at that time.

Yes. Leasing of the state-owned oil and gas rights for exploration and development offered in a public auction generates revenue in three ways:

• Lessees pay a “bonus” to acquire the lease rights.
• Lessees pay rent on acreage leased.
• Lessees pay royalties.

Royalty payments are a percentage of the gross value of the oil or gas produced and are determined at the time the product is sold.

Over the last 7 fiscal years, the leasing of state-owned oil and gas rights has generated more than $255 million. Michigan’s state constitution requires that this revenue currently goes into the Michigan State Parks Endowment Fund and the Game and Fish Protection Trust Fund. These funds allow for improvements and increase recreational opportunities for everyone.

Yes. In Michigan, all oil and gas exploration and development on state and private land is regulated by the Michigan Department of Environment, Great Lakes, and Energy's Oil, Gas, and Minerals Division. For more information regarding oil and gas regulations, please EGLE's Oil and Gas webpage.

There are several means of addressing environmental concerns with oil and gas development. For example:

• Parcels nominated for leasing go through a classification review by resource professionals to determine the appropriate level of surface use that should be allowed (see related questions regarding lease classifications and stipulations for further information).
• The state lease prohibits drilling within wetlands; habitat identified as critical to the survival of endangered species; and any drilling within 1,320 feet of any lake or stream.
• The lease is subject to all applicable existing or subsequent federal and state laws and rules.
• The lease within itself is not an authorization to drill. Separate application(s) and approval(s) by EGLE are required prior to drilling activity.
• EGLE’s regulatory rules are continually updated to ensure protection of the natural resources while balancing the development of both private and public minerals. For instance, EGLE has implemented a nationally recognized water assessment tool for evaluating the potential effects of water withdrawal and usage on the environment. If a proposed withdrawal is likely to cause an adverse resource impact, the proposed activity will not be allowed as presented.
• If a well pad location is proposed on state surface, additional site review is completed and separate written approvals are required from field biologists, foresters, the State Archeologist, and others to limit surface disturbance.

The following are examples of standard provisions in the State of Michigan Oil and Gas Lease:

• A 1,320-foot setback from lakes and streams.
• Prohibits operations in wetlands, critical endangered species habitat, and areas of historical or archaeological significance.
• Requires that a Lessee must submit a detailed development plan to the DNR, as Lessor, simultaneously with any drilling permit application submitted to EGLE.
• Requires that pipeline routes follow existing well roads or utility corridors and be buried below plow depth (typically 4 feet) unless specific written permission from the DNR, as Lessor, is granted.
• Does not allow for a reclassification approval from the LND classification if there will be impairment of wetlands; endangered species habitat; historic archaeological or cultural sites; or areas of special wildlife, ecological or recreational significance.

Severed minerals occur when the mineral estate, which includes metallic mineral rights, is severed from the surface estate. In this case, one party may own the right to farm the land, build a house, or graze cattle, while another party may own the right to explore for and produce the metallic minerals from beneath the land at the same property, if such minerals exist.

The state of Michigan Oil and Gas Lease form contains a clause requiring the Lessee to notify the surface owner of the intent to enter the land prior to any operations. The Lessee is also required to compensate a surface owner for all damage or losses caused directly or indirectly by development operations on the leased premises.

The mineral estate is termed the “dominant estate.” That means a surface owner cannot prevent a mineral owner from extracting those minerals and must grant them reasonable use of the surface to extract minerals from the property. However, the owner of the surface estate may be entitled to compensation for use of the land, such as for damage to crops or trees.

Not necessarily. State ownership of the oil and gas rights merely signifies that the state owns the rights to develop oil and/or gas from the property if it exists. Issuance of an oil and gas lease on state lands indicates a company or individual has interest in exploring for oil and/or gas under the property.

However, oil and gas development is often a “hit-or-miss” proposition. Oil and gas must be recoverable and exist in quantities large enough to support commercial production. Several leases are issued for everyone that ultimately proves to be viable. The state of Michigan owns nearly 6.2 million acres of oil and gas rights, but currently has commercial production on just more than 400,000 acres.

There are four categories of lease classification:

• Leasable development (allows surface use that conforms to lease terms).
• Leasable development with restrictions (allows surface use that conforms to lease terms and additional added stipulations).
• Leasable nondevelopment (does not allow surface use without separate, written permission from the DNR).
• Nonleasable (mineral rights will not be leased). Nominated parcels are classified for leasing after a review by biologists, foresters, the State Archeologist, and other professionals to determine the appropriate level of surface use for the parcel based on its resource features.

Nominated parcels are classified for leasing after a review by biologists, foresters, the State Archeologist, and other professionals to determine the appropriate level of surface use for the parcel based on its resource features.

Stipulations are additional restrictions or requirements that are added to an oil and gas lease. They are determined by the DNR based on a pre-lease classification review of nominated tracts. For example, the classification review may find that a well pad already exists on the nominated parcel, and the department may add a stipulation to the oil and gas lease to restrict development to the existing well pad. Other stipulations might address the placement of drilling equipment or roads on a parcel, or address wildlife and other natural resource issues.

Administrative rules are adopted by the various state agencies to guide them and the public in the conduct of their agency responsibilities. The DNR has developed and implemented rules to guide the process of oil and gas leasing on state lands.

We use a variety of methods to notify the public regarding the leasing of state- owned oil and gas rights:

• Our website contains a variety of information regarding the leasing of state-owned mineral rights – including nomination information, oil and gas lease auction catalogs, oil and gas lease auction results, and mineral leasing procedures and forms.
• A public notice regarding proposed leasing is posted on our website and in newspapers serving areas of proposed lease activity. Public notices are distributed to local newspapers in time to give the public 30 days to review and comment on tracts nominated for leasing before any decision is made regarding the application to lease the mineral rights.
• We send information regarding proposed mineral leasing to the county commissioners and township supervisors where nominated parcels are located.
• We send notification directly to owners of the severed surface estate, where applicable.
• We place ads in various trade journals serving individuals and oil and gas companies active in Michigan and surrounding states regarding proposed oil and gas leasing.
• We distribute press releases regarding proposed oil and gas leasing.
• We send information regarding all mineral leasing activities to interested parties who have signed up for email notification through the GovDelivery system.

Yes. Public comment is an important component of every oil and gas lease auction.

Written comments may be sent to:

Michigan DNR
Minerals Management Section
P.O. Box 30452
Lansing, MI 48909

Or via email at DNR-LeaseManagement@michigan.gov.