The verticle pugh clause serves to release unexploited formations above and below the producing zone after the primary term (the allowable delay) expires. In leasing you are leasing the right to produce your minerals, why should formations that a current lessee have made no effort to produce be tied up past the end of the primary lease term? If your lessee has made no effort to produce more than a single zone you should be free to lease these other zones, if any, to some company that would like to produce them. I think mineral owners often forget that the essence of the lease is the company’s desire to produce your minerals, not to produce one zone and stockpile the rest so they can assign your unused minerals to someone else at a huge profit a decade or two in the future. Personally I think you would spend the proceeds from assigning these other formations better than a lessee, but if you would rather your lessee get the money, then pugh clauses don’t matter. I think it likely that you will agree with me that you personally, would spend the money better. As to your other questions, I think they should shoulder hazardous waste liability, after all, you have no control over their actions in extracting, storage or transport of oil and gas. A cost free royalty with no fees and deducts, should be easy to negotiate, but that isn’t usually the case. Production costs, transport costs and the conditioning of gas for sale affect your bottom line. It’s much akin to buying a new truck, the dealership is going to try to make money on the back side of the deal in the contract. I would expect a much lower royalty% offer for cost free with no deducts. I highly recommend all of Buddy Cottens blogs, and you should pay special attention to the one about gas produced and sold. The operator will charge you for the machinery to dehydrate, filter, separate, compress and God knows what else gas from wells on your lease and use without paying you, the gas from your well to power the machines to process not only your gas but theirs as well. I would want to be paid for gas produced and saved, not just produced and sold. I think free use of gas over 30 years time could mount up. If nothing else you could use it as a point to gain a concession elsewhere. Good luck with your lease.
Mark Presley said:
Forgot to ask......what is the value of a Vertical Pugh Clause if all the drilling is horozontal?