Beware of Marcellus Shale Oil and Gas Lease Addendum “Headings”

Not All Terms are Created Equal

Many landowners who have familiarized themselves with the Marcellus Shale natural gas leasing process have learned certain “key phrases” or “key terms” that are valuable to the landowner when evaluating an Oil and Gas Lease Addendum.  However, landowners must be aware that ALL ADDENDUM HEADINGS ARE NOT CREATED EQUAL.

As an example, one of the most important landowner friendly terms to be included in an Oil and Gas Lease Addendum is a “PUGH CLAUSE.”  However, companies and their agents are very wise and recognize that landowners are familiar with key terms and phrases that they want included in their Oil and Gas Lease addendum.  Accordingly, many Oil and Gas Lease Addendums will have “Headings” using keywords and phrases such as “Pugh Clause”, or “Commencement Provision.”  However, there are many different forms that a “Pugh Clause” or Commencement Provision” many take.

Specifically, there is what I call a “Pure Pugh Provision” that would require that any non-unitized acreage reverts back to the landowner at the end of the primary term.  However, Pugh Clauses may be modified in many different ways, but are still presented under the heading of “Pugh Clause” in the Oil and Gas Lease Addendum.  For example, some “Pugh Clauses” may not take effect unless the landowner owns an excess of a stated amount of acreage.

For example, a Pugh Clause may state something to the effect of “if the Leasehold covered by this Oil and Gas Lease covers more than fifty (50) net acres and more than fifty percent (50%) of the Leasehold covered by the Oil and Gas Lease is not included in the production unit established by Lessee, this Lease shall automatically terminate two (2) years (“Extended Term”) after the expiration of the primary term…”  Although this abbreviated example appears under the heading of a “Pugh Clause” this clause would not even apply unless the landowner owns at least fifty (50) net acres.  In other words, if the landowner owned forty-nine (49) acres, this “Pugh Clause” is entirely irrelevant for the landowner and does not operate to offer them any Pugh Clause protection whatsoever.  Also, this modified “Pugh Clause” has an additional “extender” that would allow the company two additional years to seek to unitize the remaining acreage should they meet the other condition precedent.

I have seen modified “Pugh Clauses” that require the landowner to own at least one hundred (100) net mineral acres in order for that “Pugh Clause” to take effect.  The landowner must not merely look at the “headings” and draw a conclusion that they are protected by a Pugh Clause. The landowner must understand the language contained within the “Pugh Clause” provision to determine what exactly is being offered by the gas company.

A situation can occur where the landowner requests that a “Pugh Clause” be added to their Oil and Gas Lease Addendum and the landman advises the landowner that there is in fact a “Pugh Clause” contained in the Oil and Gas Lease Addendum. This may be true, but it is important that the landowner understands whether this “Pugh Clause” will even apply to their situation, or whether the “Pugh Clause” language will sufficiently cover their concerns.  This same issue often arises in respect to “Commencement Provisions,” “Shut-in Provisions,” “Free Gas Clause,” “Clean and Green Provision,” “Timber Clauses,” and of course “Pipeline Clauses.”

I cannot stress enough that just because a landowner has a heading entitled “Pipeline Provision” does not mean that they have the pipeline protection which they desire to be included in the Oil and Gas Lease Addendum. It is extremely important for the landowner to understand their Agreement.

Often a “Pure Pugh Clause” may be unattainable on a particular parcel, but it is important that the landowner understands what they have and what they do not have when assessing whether they want to execute their lease. It is not simply enough to know that the landowner wants a “Pugh Clause,” “Commencement Provision,” “Shut-in Provision,” ETC., but more importantly the LANDOWNER MUST FULLY UNDERSTAND THE LANGUAGE WITHIN THAT PROVISION AND HOW IT CAN BE MODIFIED IN THEIR FAVOR.

The true negotiation skill is to push the language within the Addendum provision to the most valuable point to benefit the landowner but yet still acceptable to the gas company.  Again, this is where understanding the market, the company’s leasing history, and what is available by other companies in the region is a great value to a landowner. 

Douglas A. Clark, Esq. – Protecting Pennsylvania Landowners