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Permalink Reply by Randy Cole on March 23, 2010 at 4:30pm

Most people who are not intimately familiar with leasing their minerals and/or land for the purposes of oil and gas exploration simply are not familiar with a pugh clause or its importance. As a general rule, a pugh clause will limit the rights of the lessee (person leasing your property) to hold particular depths or amounts of your property by production. Typically there are two kinds of pugh clauses; the vertical pugh, and the pugh with continuous drilling clause.

Neither of these are standard in the lease forms you may receive, and must be requested by you the "lessor".

Verticle Pugh Clause:
A Verticle pugh will limit the depth of any lease as to the deepest producing formation. This is important as most oil and gas producing areas of the country may hold differing geological formations at different depths. West Texas, for instance, may be capable of producing at 1000 feet and also again at 5000 feet. The vertical pugh clause will ensure that you are only leasing the rights to a particular depth. This will leave your minerals at other depths open and available for you to lease at other depths.

Pugh with Continuous Drilling Clause:
This clause may become important if you have a considerable amount of acreage. For instance, if you have a 1000 acre property, and the field rules in your area allow for drilling units of say 320 acres. You would not want an operator to drill one well on a 320 acre pooling unit and subsequently hold the entire 1000 acre lease. It would be optimal if forced them to continue to develop the rest of your 1000 acres every 180 days from completion of the prior well. This is nature of the continuous drilling clause, which forces the operator to act, or lose that portion of the lease which has not been unitized. The Drilling portion of the clause sets the time frame in which they must continue to drill/develop. The Pugh portion simply states that if those requirements are not met, they must release that portion of the land which is not being developed.

The pugh clause is typically a protection for the land owner, and acts in their best interest
. In historically active areas like Louisiana, And Western and Eastern Texas, the interest may already be extremely fractured into multiple depths. The verticle pugh clause has made appearance in the unconventional shale plays like the Barnett Shale, Haynesville Shale, and Marcellus Shale. The implications and importance of such clauses will certainly vary by region.

I am not an attorney, and this is not legal advice. I suggest you seek the advice of an attorney before making any legal decisions. Just spilling some knowledge here.

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