If the cline/wolfberry plays have multiple verticle pay zones... does a mineral owner lease specifically for those zones or do you let an oil/gas company drill deep and get paid all the way up? Is there such a thing as a vertical pugh clause? How much push-back do mineral owners get when negotiating this in a lease? How does this work in the Permian? I asked these general questions in another forum... but i pose it to this group. thanks, jhh
Google “vertical Pugh clause”. It will return language for,that exact circumstance. I have successfully had that clause included in multiple leases. Not much push back, it is fairly widely accepted. I like language similar to "lease expires on strata x feet above and/or below the deepest depth of production.
Jack:
Go to the box at the upper right hand side of the forum page and type in "pugh clause". This will pull up all past discussions regarding this topic. Lot's of good information on these past posts.
Roy and Charles,
Thanks for the advice. Could you or someone else provide an example... in general terms... what a Pugh Clause in a lease would look like in the Permian... Midland, Howard or Mitchell counties? I've been hearing strong resistance on this issue from some Oil/Gas companies or land men representing these companies when negotiating leases. I looked through the Pugh Clause postings... about three pages... will look through more. Also, "favored nation clause".
Jack,
The best vehicles to avoid a lessee from unreasonably holding undeveloped minerals past the primary term of a lease can be found in documenting the interpretation of the lessee's geologic exploration intent and current area plays. Allow the lessee to spend the high risk dollars how it chooses thereby earning the right to produce from geologic formations it develops or tests proven to be economic. Focus on documenting what comes back to you and when including access rights. The best "Pugh Clauses" are based on a good understanding of the local geology by both the owner and lessor and that may be why "standard" continuous development language is so hard to find and apply for all parties except landmen, of course who want all they can get for as long as they can get it.
Also, most vertical Pugh clauses reserve the mineral rights below the lowest producing zone. With the stacked pay zones in the Permian, you may want to consider tring to reserve the shallower non-produced zones as well.
Wade and Gary... thanks for direction. We're accustomed to Pugh clauses that limit depth below deepest producing zone. Now we have to get use to 100 feet above producing zone. What a world! And it seems even more complicated out in the Permian because they say it has so many producing zones. But we're grateful to have such things to worry about! thanks again. jhh
I forgot... how acceptable among O/G companies... are Pugh clauses that limit above and below producing zones? It seems every time you turn around they're fighting mineral owners on something.
jhh
Wade Caldwell said:
Also, most vertical Pugh clauses reserve the mineral rights below the lowest producing zone. With the stacked pay zones in the Permian, you may want to consider tring to reserve the shallower non-produced zones as well.
I think producing zone is too vague, if the operator argues that three zones are communicating you have to get your own geologist to test and counter the operators assertion if you want to assert differently. I would want to reserve XXX feet above / below perforations which should be reported in the completion report. I think that would remove wiggle room/ be an easily determinable fact.
r w kennedy. that's a good idea. does that language work with vertical fracking and horizontal fracking wells?
Jack, it should. All it does is take the guesswork out of it, gives real definition to the depth severance clause. Producing zone is so vague, too easy to get around when the operator can, for example, claim three zones as a common source of supply. People forget that the operator can deal with you now or in the future for the other zones. Sure the operator would love to hold all zones to the center of the earth with the production from one zone, but it shouldn't be a problem for the mineral owner to ask them how much do you want and set a price for it. If the lessee wants it all, hands you a lease form that says he wants to produce your minerals, all he has to do is be as good as his word and produce, or try to produce them and then he does have them all. If the lessee wants to rail against that, it's because he wasn't telling the truth in the first place. The lessee says in the lease that they want to produce your minerals, not just a tiny part and hold the rest until they appreciate so they can assign them to someone else at a profit that does not benefit you at all, except possibly now your minerals would belong to someone who might produce them.
I can see where an operator could get alot of use out of a wellbore where you have multiple stacked formations, and it probably wouldn't be possible to get all formations into production simultaneously. It might take decades before the last produceable formation is tapped. The operator has an investment to protect in that situation. I believe that the operator could protect his investment in that wellbore with a wellbore lease. The operator/lessee and mineral owner would all profit from the wellbore until it was plugged and abandoned. The mineral owner would be able to lease zones that are not yet producing to their existing lessee or a competing lessee. If the first lessee does not want competition, they would be free to drill more wells under the primary term of the lease or lease the non-producing zones again and hopefully drill more wells.
Is not the whole premise of a lease, that you want your minerals produced? If only a tiny fraction of your minerals are produced, are you receiving the benefit you thought you were bargaining for? Every lease offer I have ever received started with we would like to pay you xxx dollars per net mineral acre for the right to produce your minerals, not part of your minerals, not get all of your minerals into production over the next 50 years, not let us stick a low producing well on your acres so we can hold all of your minerals until production ceases in the hope that your acres will appreciate and that we can flip them at great profit which you as lessor will not participate in. It would be refreshing to drag all of this out into the light of day and actually work out a business deal, that benefits both parties. This will not happen in many cases because mineral owners are not aware of how a lease works and the lessee provides a lease with a prepackaged deal that favors him. If you don't add protective clauses to force the lessee to get your minerals into production, the lessee is only bound by what would be expected of a prudent operator and once again we are are in the "vague" territory. Vague does not favor the smaller mineral owner. Avoid vague, pin things down. Didn't mean to write a book. Yes, using perforations as the baseline for depth severance clauses would work in verticle and horizontal wells. I think the lessee may resist it's use for the reasons stated above, they would prefer something more vague.
Yes, there is such a thing as a vertical Pugh Clause. You should not get too much push-back unless the operator is interested in more than one stratum. From my admittedly limited experience in the Permian Basin, most operators were interested in just one specific depth.