Last Updated on Named after Lawrence Pugh, a Crowley Louisiana attorney who developed the clause in 1947, the Pugh clause may turn out to be a tripwire for unaware investors in an oil and gas lease contract.
Before the Pugh Clause was introduced, lessors were exposed to the risk of placing more property under lease than they intended. When written properly, a Pugh clause is capable of locking down the number of properties. These can be included in a lease, especially after its initial expiration date.
What is the Pugh clause in an oil and gas lease?
A Pugh Clause is enforced to ensure that a lessee can be prevented from declaring all lands under an oil and gas lease as being held by production. This remains true even when production only takes place on a fraction of the property.
Just like many oil and gas clauses, a Pugh clause has no industry standard for it. The clauses are specifically written with respect to the contract that is under consideration. This often tends to be pro-lessor.
It is possible for a lessor who has a huge amount of acreage under lease to have these acres tied up by lease contract. This could extend further than the initial lease dates. It may also be impossible for them to offer these pieces of land to anyone else for lease.
How Does a Pugh Clause Work?
A pugh Clause seeks to create a limitation within the contract. A correctly written Pugh Clause contains a recognizable trigger that places it into operation. Without the trigger, the lessor may not have the protection expected.
With a Pugh clause, a lessor is also protected. This is true if certain non-contiguous lands are unitized in a certain way to ensure that a lessor is prevented from providing a fraction of the property to another party.
Types of Pugh Clauses
To further understand how Pugh clauses work, it is important to learn more about the different types of Pugh clauses. Pugh clauses can be classified into vertical, horizontal, or both.
What is a Horizontal Pugh Clause?
A horizontal Pugh Clause spans certain acreage horizontally across the property.
Example of horizontal Pugh Clause
A horizontal could offer a lease that spans certain acreage, including 30 acres across the property. This implies that a lessee would be able to access 30 acres of land across the drilled well, but no further.
What is a Vertical Pugh Clause?
A vertical Pugh Clause is typically specified by depth into the soil.
Example of vertical Pugh Clause
A vertical Pugh Clause could present a lease to a specific depth. This could include about 150 feet below the drilled well. What this implies is that the lessee would be restricted to drilling to 150 feet. They wouldn’t be able to go further. The lessor could still lease any property below that specific range to another interested party.
Horizontal vs vertical pugh clause
While the horizontal Pugh clause covers acreage horizontally, the vertical Pugh clause is determined by depth into the soil.
Other additional variations of the pugh clause
Some additional variations of the Pugh clause to understand are discussed as follows:
Activation of Pugh Clause
A pugh clause may be triggered on an ongoing basis as production stops in producing units containing fractions of the lease. This clause may also be initiated only once at the end of the primary term. It all depends on the terms in the Pugh clause.
The Pooling Clause
This is another important clause in an oil and gas lease. A pooling clause ensures that leased premises can be combined with other pieces of land to create a drilling unit. Then, any proceeds generated from production anywhere on this formed drilling unit are allocated. This is based on the percentage of the acreage of these tracts. This is divided by the total acreage of the drilling unit. Simply put, the pooling clause determines unit size just for the surface pugh clause
Spacing Unit Surface Clause
In rare instances, it has been specified in a surface pugh clause that the surface unit is the minimum allowable spacing under field rules.
References associated with the spacing unit appear to be done by lessors. This has been attempted to address the issue of an entire pooled unit being held by one well when it is possible to drill multiple wells under field rules.
Wellbore Only Clause
The wellbore only pugh clause releases all acreage beside the wellbore once the primary term and extensions expire. This is a variation of the Pugh clause that has overseen a more recent development. It is often coupled with a depth Pugh clause. Under state spacing rules, lessees can enjoy protection from third party drainage. However, retaining acreage in the spacing unit is almost impossible.
This type of pugh clause is often seen only on leases that reflect a large acreage position in a lucrative field. This gives the landowner considerable negotiation power. This is especially so in lease negotiations. For smaller mineral properties, it may be wise for lessees and lessors to avoid undergoing the added negotiation associated with wellbore only pugh clauses.
Release Owed
There is a practical issue that relates to the partial release owed when a pugh clause is triggered.
The partial release owed when a pugh clause is activated is a practical issue that some lessors have negotiated provisions to specifically address.
It is possible for lessors to negotiate for a release to be owed. This is especially so after a certain number of days that a unit stops production, as defined by the lease terms.
Statutory Clause
Certain state legislatures have ensured that lessors must be protected from an inability to negotiate for a Pugh clause. Statutes have been enforced by these states. These basically include a Pugh clause to oil and gas leases. These have been taken after the effective date of the statute.
Additionally, some state legislatures have determined that lessors need to be protected from a failure to negotiate for a pugh clause. These states have enacted statutes that essentially add a pugh clause to oil and gas leases taken after the effective date of the statute.
What are the benefits of the Pugh clause?
The Pugh clause incentivizes the oil and gas company to keep exploring for oil and gas on your property. You can enjoy the significance of including a Pugh clause in your Oil and Gas lease, especially if a significant portion of land is being leased to an oil and gas company, which is under the lease.
Why is a Pugh clause important?
A Pugh clause is designed to restrict the acreage that one well holds to only the acreage that is within the production unit, which is covered by that well. The absence of a Pugh clause makes it possible for a lessor to discover that more land remains under lease than they expect, especially after the primary term expires.
Does Pugh Clause Protect You?
A landowner can enjoy protection from a Pugh clause. This is done by ensuring that non-producing and non-pooled portions of the leased premises can be released once the primary term reaches an end. It is wise for a landowner to include a Pugh clause in any oil and gas lease carried out by the landowner.
Which Pugh Clause is Best for You?
It is worth noting that no standard Pugh clause that can tackle all situations appropriately exists. Essentially, the specific situation you find yourself in should be considered by an expert.
What to be aware of?
All oil and gas landmen must acquaint themselves with what Pugh clauses are before they proceed to negotiate leases with landowners. All parties must review the contract completely and carefully while they make sure that all clauses are understood before signing the agreement.
It is worth stressing that Pugh clauses are created differently. For this reason, it is imperative to review and understand the basics of a Pugh clause before negotiating an oil and gas lease. This should remain the case when evaluating the impact of a Pugh clause on the extension of a lease.
Is there an Alternative to Pugh Clause?
Yes, an alternative to the Pugh clause exists. This is when you never desire pooling in the oil and gas lease, which would be a retained acreage provision.
FAQs
Why is it called a Pugh clause?
Ans: It is called a Pugh clause since it was named after Lawrence Pugh. He was a Crowley Louisiana attorney who developed the clause in 1947
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