It has long been the rule in the Oil & Gas industry that productive leases remain in effect so long as they are Producing in Paying Quantities (PPQ). Large lease holders figured out that a single productive well could hold hundreds or thousands of acres of land for decades. Shortly after World War II, a lawyer (Pugh) began including language in his leases to limit mineral owners being abused in this way. This practice caught on and expanded to including releases of depths beneath active production.
Properly drafted “Pugh clauses” allow portions of mineral leases to expire as to surface area or depths that are not timely developed by a lessee or operator. If a lease has effective Pugh Clauses then usually the lessee will have to release any acreage or depths not actively included in a drilling or pooled unit at any time after the Primary Term.
There are Vertical Pugh Clauses and Horizontal Pugh Clauses which have distinct meanings, but unfortunately those terms have been used interchangeably over the years, so their meanings differ depending on who is talking. To help restore clarity, at Bower PLLC we use the terms Surface Pugh and Depth Pugh.
The Surface Pugh clause is language which automatically reverts surface acreage not included in a productive drilling unit or pooled unit back to the mineral owner after the Primary Term. It creates a “use it or lose it” policy for the lessee or operator.
The Depth Pugh clause is language which automatically reverts depths below the deepest productive zone to the mineral owner. With the advent of horizontal drilling, this clause can also be drafted to release acreage above the actively producing zone(s). However, most vertical well operators will want to reserve the right to explore “up-pipe.”
At Bower PLLC we negotiate and draft leases on behalf of our clients. For mineral owners we include Pugh Clauses to make sure that acreage is properly explored or returned to the owner. Our E&P clients seek to have lease language that allows them to successfully complete their drilling program without overly burdensome release provision.
If you have questions about lease provisions, including the Pugh Clause, call Bower PLLC at 214-799-2142 or reach out to us using the contact form below.
This page was originally posted on 5/10/2018.