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Permalink Reply by Philip Brutz on April 6, 2014 at 11:22pm

What is the Meaning of "Held by Production":

Written by: Attorney Dale Tice

Many of the oil and gas leases used by the gas companies leasing in the Marcellus shale include a primary term of five years. This means that the gas company has five years to begin drilling operations on the leased premises or the lease will expire at the end of the primary term. Although the lease may not specifically include the expression "secondary term", the gas lease moves into the secondary term when drilling operations begin and then is extended as long as gas is produced in paying quantities. The industry term used to describe a gas lease that is extended in this manner is "held by production".

The gas leases used by the oil and gas companies operating in the Marcellus shale also include a provision allowing the gas company to pool the landowner's premises with other leased properties to form a production unit. Landowners signing a gas lease must understand that commencement of drilling operations anywhere on the unit extends the entire production unit into the secondary term. As a result, a producing well holds by production all of the property placed in the unit.

The oil and gas companies operating in the Marcellus are spending millions of dollars on lease cash bonus payments. Naturally, the companies don't want these leases to expire as they may be forced to approach the landowner with a new lease at the end of the primary term. Negotiating another lease is particularly unattractive to the operators in light of the general trend for cash bonus payments to increase as the Marcellus play matures. To avoid this result, the gas companies have increased drilling activity despite low natural gas prices. Chesapeake Energy CEO Aubrey McClendon has said that up to 50% of all natural gas drilling is done to retain leases that would otherwise expire.

Clearly, it is the goal of the gas companies to hold as much land by production as possible. Because production of gas will hold all of the acreage in the pooled unit, the gas companies have an incentive to make large production units. In fact, some companies have requested that landowners sign an amendment to their gas leases to remove any limit on the size of a production unit. Before signing any amendment to a gas lease, landowners need to understand the impact the amendment may have on their future royalties.

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Permalink Reply by Mark McGrail on April 7, 2014 at 2:12am

In general; once a well has been drilled (or drilling activity has commenced),and is producing the lease remains in force for the life of the well, and until a release of lease is received. The five and five terms no longer apply.

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Permalink Reply by adam sorell on April 7, 2014 at 4:08am

It's a "paid up lease" . It has a market enhancement clause I told the company i wanted 20% gross at the wellhead but they refused.

lease reads:

PAYMENTS TO LESSOR. In addition to the bonus paid by Lessee for the execution hereof, Lessee covenants to pay Lessor, proportionate to Lessor's percentage of ownership, as follows:
(A) DELAY RENTAL: To pay Lessor as Delay Rental, after the first year, at the rate of five dollars ($5.00) per net acre per year payable in advance. The parties hereto agree that this is a Paid-Up Lease with no further Delay Rental and/or Delay in Marketing payments due to Lessor during the primary term hereof.
(B) ROYALTY: To pay Lessor as Royalty, less all taxes, assessments, and adjustments on production fromthe Leasehold, as follows:
1. OIL: To deliver to the credit of Lessor, free of cost, a Royalty of the equal ___________
percent (__________%) part of all oil and any constituents thereof produced and marketed from the Leasehold.
2. GAS: To pay Lessor an amount equal to _________ percent (_________%) of the revenue realized by Lessee for all gas and the constituents thereof produced and marketed from the Leasehold, less the cost  to transport, treat and process the gas and any losses in volumes to point of measurement that determines the revenue realized by Lessee. Lessee may withhold Royalty payment until such time as the total withheld exceeds
fifty dollars ($50.00).

(C) DELAY IN MARKETING: In the event that Lessee drills a well on the Leasehold or lands
pooled/unitized therewith that is awaiting completion, or that Lessee deems to be capable of production, but does not market producible gas, oil, or their constituents therefrom, and there is no other basis for extending this Lease, Lessee shall pay after the primary term and until such time as marketing is established (or Lessee surrenders the Lease) a Delay in Marketing payment equal in amount and frequency to the annual Delay Rental payment, and this Lease shall remain in full force and effect to the same extent as payment of Royalty.

D) SHUT-IN: In the event that production of oil, gas, or their constituents is interrupted and not marketed for a period of twelve (12) months, and there is no producing well on the Leasehold or lands pooled/unitized therewith, Lessee shall thereafter, as Royalty for constructive production, pay a Shut-in Royalty equal in amount and frequency to the annual Delay Rental payment until such time as production is re-established (or lessee surrenders
the Lease) and this Lease shall remain in full force and effect. During Shut-in, Lessee shall have the right to rework,stimulate, or deepen any well on the Leasehold or to drill a new well on the Leasehold in an effort to re-establishproduction, whether from an original producing formation or from a different formation. In the event that the
production from the only producing well on the Leasehold is interrupted for a period of less than twelve (12) months, this Lease shall remain in full force and effect without payment of Royalty or Shut-in Royalty.

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Permalink Reply by Philip Brutz on April 7, 2014 at 5:04am

It does not look like there is a time limit to how long they can hold your lease by paying you a SHUT-IN Royalty.  I would recommend NOT cashing any checks from them until you talk to your lawyer.

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