Question…when is a mineral lease held by production, when the well is spudded or when production actually starts?
Hi Ejjoyce - It entirely depends on what your lease states. However, in most cases the lease will start being held at the point when the operator start “operations”. This can be from the moment the operator start constructing the pad site. It will then be perpetuated from production there after. Should production ever cease, the operator may try to hold the lease under a “continuous operations” clause but the operator will eventually have to either release the lease or drill a new well should the operator be unsuccessful with bringing the original well back to a producing state. Hope this helps.
I wouldn’t technically consider “continuous operations” to be HBP. Production being sold in economic quantities is all I consider HBP. You can extend beyond the primary term if the lease allows for continuous operations (like spudding a well every X days, or a guy with a shovel moving dirt around every every X days, depending on how it’s worded), but it’s not production that’s extending it if so.
For example, a company might have 100,000 net acres they’ve leased where they have access to develop and produce as long as they have continuous operations across the acreage. Each well they drill might hold 160 acres with production, but the entire 100,000 isn’t HBP.
Referring to my last post of when does HBP, I read my lease. This sentence may refer to that, “At the expiration of the primary term, if Lessee has commenced a well on the leased premises or lands pooled therewith during the primary term, then this Lessee Shall not Terminate and Lessee shall be deemed to have begun “Continuous Development Program”.
A pad is almost complete for the 2 wells to be drilled but to date no permit has been issued. Since the pad has been started does that mean my lease is now HBP? The 3 yr. term of the 5 yr. lease will expire this fall.
A permit should soon follow as there has probably been a surveyor out to survey the pad site and drilling location, permits usually follow as their plat is required and will be included with the permit. Just because the operator has started building a pad site and it appears operations have begun to start the drilling of a well does not classify your lease to be HBP. HBP stands for Held By Production, hence, there will have to be production in paying quantities to initially hold your lease past the expiration date of any primary or secondary term. Once the lease is past any expiration date and once production begins to cease and is not longer producing in paying quantities, then the operator will either have to drill a new well or they will continue to try and hold your lease by the continuous development program, which should end up with getting the existing well back up to a good producing status or they, again, will have to drill a new well in order to hang their hat on the continuous development clause of your lease.
You are skiing this question too early. Your lease is still in the 3 year primary term. If the lessee extends for 2 year option period, then it will still be in the primary term. The time to determine whether a lease is HBP is when the primary term ends. A lot can happen in the next 6 months.
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