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Permalink Reply by David on September 17, 2010 at 3:41am

It depends on your lease. If you have a pugh clause then you may be able to. The following is one example:
The Pugh Clause is the language used in an oil & gas lease to spell out what happens to the portion of the acreage you leased that does not either contain a well or is not included within a producing petroleum pool or unit. The typical Pugh Clause reads as follows:

"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."

While the clause may seem complicated at first, its meaning is quite simple: at the end of the primary term, the lease will expire as to any part of the land that is not being used by the petroleum company. Without the Pugh Clause, if your lease covered 600 acres and the petroleum company only put 20 acres in a pooled unit for a producing well, the lease would remain in effect as to the 580 acres not being used as well as the 20 acres in the unit. Even though you are receiving no production (and thus no profit) from the 580 acres, they would remain tied-up by the lease indefinitely. With the Pugh Clause, the 580 acres would be released from the lease at the end of the primary term. You would continue to receive royalties from the production from the 20 acres, and the 580 acres would be available to lease to another company when one comes along.

Depending on the additional language in the lease, you must keep in mind that the petroleum company may be able to hold on to the 580 acres in our example through methods other than actual production of oil or gas. Some of the typical ways that land can be maintained absent production is through seismic work, continued drilling operations, or additional rental payments. As with all provisions of the lease, the Pugh Clause and any additional language must be worded very carefully to provide maximum opportunity for the petroleum company while also providing maximum protection for the landowner.

Permalink Reply by drillman on September 22, 2010 at 3:54am

FYI: Very few companies include Pugh provisions as part of their lease agreements, especially for smaller parcels (50 acres is still considered quite small). Pugh language was originally drafted to address very large tracts of land (i.e. ranches in the Rocky Mountain areas of Wyoming, Montana, Utah, etc) some consisting of thousands of acres. Mineral owners on the east coast with legal representation have been pushing for Pugh provisions and developers have been reluctant to agree. Having said that though and given the strength of the Marcellus play, more developers are willing to consider. I suggest that anyone considering executing a lease who has 50 or more acres push for inclusion of Pugh language in their lease agreement.

Permalink Reply by Jeff on September 17, 2010 at 12:52pm

Hi David

That was explained very well.

Thank you
Jeff

Permalink Reply by David on September 17, 2010 at 2:24pm

I wish I could take credit, but I got it from the web