Oil and Gas Lease Clauses and Provisions Part 2, The Pugh Clause

The Pugh Clause is named after the Louisiana Barrister Lawrence Pugh in 1947 after the state Supreme Court ruled on Hunter v. Shell Oil Co., 211 La. 893 (1947). In this case, the Court, held that production from a unit with maintain the Oil and Gas Lease in force as to all lands described on the lease even if they are not contiguous.

What does this mean for the mineral owner? It means than if he leases multiple tracts of land on the same oil and gas lease, all lands with be held by the lease even if only one well is producing in paying quantities. As the mineral owner, you should request a Pugh clause from the lessor.

An example of a vertical Pugh Clause:

• "If at the end of the primary term, a part but not all of the land covered by this lease, on a surface acreage basis, is not included within a unit or units in accordance with the other provisions hereof, this lease shall terminate as to such part, or parts, of the land lying outside such unit or units, unless this lease is perpetuated as to such land outside such unit or units by operations conducted thereon or by the production of oil, gas or other minerals, or by such operations and such production in accordance with the provisions hereof."

With the remarkable advances in engineering with regards to horizontal drilling, many of the wells drilled in the past few years in these areas are indeed horizontal wells. Often times, the lessors are now requesting Pugh clauses to release the deeper geological formations after the expiration of the primary term.

An example of a horizontal Pugh Clause (also known as a depth clause):

• All rights 100' below the deepest depth drilled shall be released one (1) year following the expiration of the primary term, or upon completion of any drilling or reworking operating conducted thereunder which was commenced during the primary term, whichever occurs last.

Many lessors will want a clause such as " Lessee will release all depths below the stratigraphic equivalent of the deepest producing horizon." This sentence injects ambiguity and uncertainty in the oil and gas lease. While this clause initially seems more restrictive to the lessee, there is current on-going litigation regarding the term "stratigraphic equivalent," and neither party should desire to end up in court.

Interestingly enough, the State of Oklahoma enacted a statutory “Pugh” Clause*, Title 52 O.S. Section 87.1(b), which provides that “in case of a spacing unit of one hundred sixty (160) acres or more, no oil and/or gas leasehold interest outside the spacing unit involved may be held by production from the spacing unit more than ninety (90) days beyond expiration of the primary term of the lease. ”This law became effective May 27, 1977 and may or may not apply in your case depending on the date of your lease. For the Oklahoma mineral owner, this means that he does not have to insert a vertical Pugh clause into his lease, but may still request a horizontal Pugh clause or depth severance.

More to follow.

BR