Oil & Gas Lease Proposals – What Is The Pugh Clause?
November 22, 2017
If you are in the business of buying and selling oil and gas royalties, there are many laws and stipulations that apply to the leasing process. One such clause is the "Pugh Clause," which is one that every owner looking to sell gas and oil royalties should understand.
The Pugh Clause protects those who sell gas and oil royalties from having large amounts of land held by production when only a small part of the land is producing.
What Is the Pugh Clause?
The Pugh Clause, which is also referred to as a freestone rider, is a clause that can be added to any minerals lease when selling oil and gas royalties to protect the lessor’s control of their land. When applied by those selling gas and oil royalties, the clause limits a lessee’s ability to hold large portions of leased property if they are not being used for production.
By including a Pugh Clause, a lessor may pool land not being used by the lessee after the primary term ends and include it in other leases. There are two types of Pugh Clauses that can be used when leasing gas and oil royalties:
- Horizontal Clause - Applies to the production land.
- Vertical Clause - Applies to the production depth.
How Does the Pugh Clause Protect Sellers?
The Pugh Clause protects lessors by allowing them to regain control of land and depths that are not being produced by a company after the primary lease term has ended. Without the Clause, someone selling oil and gas royalties could wind up with multiple land areas being held by production, even when the lessee is only producing from a small portion of that land.
The Clause gives the lessor the ability to determine which land areas are not being used for production and lease them to another party.
Problems with The Pugh Clause
While it is strongly recommended for those selling gas and oil royalties to add a Pugh Clause to their lease, it is important to understand that doing so can be complicated since no standard language for the Clause exists. The Clause has been in effect since 1947 and is the result of a lawsuit involving the Shell Oil Company. Lessors and their lawyers have always used their own language to reflect the current leasing situation.
Although language that reflects each leasing circumstance is necessary because no gas and oil royalty is the same, it creates the potential for a lessor to be bound when something unexpectedly happens relating to the lease of their land. To avoid potential problems, a lessor must work with a lawyer experienced in writing Pugh Clauses who fully understands the impact of the Clause and can write it properly.
Each Clause for every lease must be individually written, since copying a Clause from another contract can very easily result in the lessor not having the control they desired over their land.
As stated above, it is very important that any lessor selling gas and oil royalties add a Pugh Clause to their lease so they can regain control of any land not being used for production after the primary lease term. Yet it is critical the Clause be carefully written by an experienced lawyer so it specifically references the exact oil and gas royalties being leased. By doing this, those who own gas and oil royalties can pool their unused land into other contracts without having to go through extensive legal proceedings!
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