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Permalink Reply by The_Baron on September 20, 2010 at 7:18

There arre two types:

In General:

Horizontal Pugh: Any lands outside of any producing unit will not be help by production. Only lands inside a producing unit can be HBP. Allows you to lease the non-producing minerals again after the primary term, and can serve to motivate a company to develop more of your mionerals sooner.

Vertical Pugh: only minerals to a certain depth can be HBP, usually somthing like to the base of the deepest producing formation or 100' below the deepest producing well. Allows you to lease the deeper depths again after the primary term.

There can be many variations of the above, but the general idea is the same.

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Permalink Reply by jffree1 on September 20, 2010 at 8:00

Baron, your opinion, please. I have seen this Horizontal Pugh Clause and I first think that the lessors were smart to include it. But, then, when I read it... I'm not so sure. It appears to release the acreage not included in a pooled unit but the last sentence seems to UNDO what the previous sentence DOES do.

15. In the event a portion or portions of the land described in this lease are pooled or unitized with other land, lease or leases, so as to form a pooled unit or units, production of oil or gas from such unit or units, or payment of shut-in gas royalties on a well or wells drilled on such unit or units, shall maintain this lease in effect only as to the portion or portions of the land described in this lease which are included in such unit or units. As to any portion or portions of the land not included in a pooled unit or units, this lease shall terminate at the end of the primary term, or any extensions thereof, unless otherwise maintained in force and effect as provided for by the provisions of this lease. However, operations for drilling, or reworking operations under the continuous operations or development clauses of this lease, conducted on lands within a pooled unit, shall maintain this lease in force and effect as to all lands described in this lease until such time as such continuous operations or development cease.

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Permalink Reply by reallyoldguy on September 20, 2010 at 8:22

Jffree1: Is this an ammendment on my lease that you are referring to?

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Permalink Reply by jffree1 on September 20, 2010 at 9:06

It is a common horizontal Pugh Clause that I see fairly often. I just question what it really means. I was hoping one of our veteran landmen would gives us their take on it.

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Permalink Reply by Two Dogs, Pirate on September 20, 2010 at 12:14

You would have to go back to the other clauses of the lease to determine what constitutes continuous drilling. Lets say that you own minerals in the NE/4 and SE/4 and they are unitizing 160 acer units for each quarter section and the lease provides for a 90 day lapse, then they would have 90 days to move to the next quarter section. Keep in mind thought the words continuous drilling and reworking that could throw the time frame sometime into the future. Like the 25,000 foot well that I have a thread on that took 2 years to complete.

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Permalink Reply by jffree1 on September 20, 2010 at 12:21

It's not the continuous drilling part that has me confused, TD. It's the fact that it says in one sentence that the lease will expire as to all land NOT included in a unit at the end of lease term and then turns right around and says that continuous operations under those other terms will hold ALL land described, whether included in a unit or not. Seems to me it is saying that as long as there is something happening to hold the land in the unit, that same operation is holding the land outside of the unit. So, where is the release of acreage and when does it occur?

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Permalink Reply by Two Dogs, Pirate on September 20, 2010 at 13:03

When they get through, just to throw clouds and create confusion, if it were me I would scratch all the continuous stuff and demand that at the end of the primary term the lease is dead as to all lands not included in the unit.

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Permalink Reply by jffree1 on September 20, 2010 at 13:10

Thanks. The last sentence, to me, seemed contradictory to the purpose of the clause.

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Permalink Reply by Two Dogs, Pirate on September 20, 2010 at 13:32

I have seen people that know what they are doing that gave continuous drilling clauses for up to 2 years past primary term but there were all kinds of other clauses that defined what continuous drilling was. Most of these leases are recorded as memo of OGML, so you don't see the wording of the actual lease.

Permalink Reply by The_Baron on September 21, 2010 at 3:08

Really depesnds on your goal.. if you are just trying to insure that your minerals are developed, allowing for non-producing pools of your minerals to be held by operations may be ok.

I'm with two dogs though, if you don't have an adequate definition of contiuous operations you could be opening yourself up for a problem. Personally I too would just strike all that nonsense altogether.

Permalink Reply by reallyoldguy on September 20, 2010 at 8:07

Thanks Baron. These clauses make more sense now. Why is it that some companies include these clauses in their leases, as standard practice, and some do not?

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Permalink Reply by Two Dogs, Pirate on September 20, 2010 at 8:19

Most do not include the vertical and many may not give it to you at all.

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