Many mineral owners don’t realize oil lease clauses can stop them from being able to lease their property again for decades. They believe if a well has not been spud by the expiration date of their lease, their lease will expire.
Because it seems pretty easy to figure out, right?
If you signed a lease with a 1, 3, or 5-year term, the lease should expire 1, 3, or 5-years from the date of your lease, right? Unfortunately, that is not always the case.
Commence Ongoing Operations Oil Lease Clauses
In many cases, the only thing an operator has to do to keep their lease from expiring on its expiration date is to “…commence ongoing operations [critical word here] in the preparation of drilling a commercially produced well.”
See the language located under clause #5 and clause #6 of a standard Oil and Gas Lease form.
But, what do “operations” mean in this context? Dirt work? Surface prep? “Commencement of operations” in this context generally means the operator does some kind of work pertaining to preparing the drilling site before the expiration date.
Under these circumstances, the operator doesn’t have to drill a producing well to extend the lease.
What to Look For
Like all other fine print, it is important to understand oil lease clauses. Clauses control the rights you are entitled to from any future operator that acquires your lease by assignment or sale. The lease may be in force for many years.
We recently got a call from the granddaughter of a mineral owner. She asked if we could assist the family in obtaining a new oil and gas lease on the family’s 120-acre tract of land, which was located in two different sections. 80 acres were located in Section 9 and 40 acres were located in Section 4, which was the section north of Section 9.
Since there had only been one well drilled in Section 4 since 1962, she thought the acreage in Section 9 was available to lease. Had her grandfather included a Pugh Clause in his original lease, then she could have gotten a new lease.
However, without a Pugh Clause, the one well in Section 4 held the entire 120-acre lease.
You read that right! One well that was drilled over 50 years ago meant there was no “open acreage” to lease. If you lease land that is located in more than one section, be sure to request a Pugh Clause as a special provision to your lease.
Types of Pugh Clauses
Vertical Pugh Clause
A Vertical Pugh Clause requires the Operator to release the rights below a defined vertical depth after the primary term of your lease expires. For example, all rights 100 feet below the deepest drilled depth or 100 feet below the deepest formation penetrated.
The means for defining the depth limitation can vary, but the intent is always the same: to release the interest from the lease for any “deeper” zones that haven’t been drilled. This allows you to grant a second lease on “deep rights” when a shallower zone has been drilled and is held under an earlier lease.
Horizontal Pugh Clause
This requires the Operator to release the rights not included in a pooled unit after the primary lease expires. Unlike Vertical Pugh Clauses which only release drilling rights to a certain depth, Horizontal Pugh Clauses release rights from the surface to all depths.
Let’s say a portion of your interest on a lease gets included in a drilling unit, but the rest of the interest lies outside of the unit. The Horizontal Pugh Clause releases all depths not in the unit on your lease at the end of its primary term.
Other Common Oil Lease Clauses
Subsurface Wellbore Easement
This allows the Operator to use your surface land to drill down vertically when the bottom hole is located on the adjacent property you do not own. If you are not careful, you could sign a lease to drill not knowing you will not receive royalty revenue if the well produces oil or gas.
Prior Offer to Lease
Operators use this clause to stop you from getting better terms after your lease expires. The clause requires you to notify the Operator if you are contacted for a new lease when your current lease expires. In this situation, you have the preferential right, but not the obligation, to lease your property for the same terms.
“Certified” Mail Notice
Until recently, the language around notifying the Operator of a transfer of interest, either by death or sale, was only required to “be in writing”. Many new leases modify the language to state the operator must be “…notified in writing, sent by certified mail“.
In this case, a letter to the Operator notifying them of the ownership change is not enough. The letter must be sent by certified mail. Be diligent and double-check what your oil lease clauses say here.
Know What You’re Signing
We can’t stress this enough: become familiar with everything your oil and gas lease states before you sign it. No one wants to be stuck in a bad lease 60 years from now.
If you have any questions, call us at (888) 693-2464. We are happy to help!
What’s the best advice you have for new mineral owners about oil and gas lease clauses? Please leave a comment below!