Recently received a lease offer in Ector County Texas. I requested a Pugh Clause be added which would protect all dept below and above the drilled area. However, The Pugh clause the leasing company sent me only allows 100 feet below and above the deepest depth drilled.
Is this right? Does this protect my rights as a mineral owner? Seems too limited to me.
Pugh clauses can have multiple wordings depending upon who wants the advantage. It would be very rare to get a Pugh clause above the depth drilled as operators tend to want everything from the surface of the earth down to what they are drilling. Most of them state that they will allow it 100’ below the base of the formation drilled. That is not to the mineral owner’s advantage because it gives the operator the top of the next formation down before they have even drilled it. And they can pull semantics by including the deeper zone in the naming convention of the zone they are currently interested in. For example, it the operator drills into the top 50’ of a formation that is 1000’ thick, but has the above language, they could save the extra 950’ of the current formation and 100’ more into the next formation without touching it.
Some mineral owners are able to get better language that is more specific to actual depths drilled, perforated and producing. In this second case with proper language, if they drilled the top 50’ of the formation and perforated it and are producing from it, then they can only save that 50’ plus 100’ more. Leaving you free to lease again in the lower portion. A difference of 900’!
Pugh Clauses and depth clauses are entirely different. Both needed in a lease. It sounds like you and Martha are talking about depth clauses. If you are negotiating a depth clause, never take the 100 ft below the deepest formation drilled used in Martha’s example, always insist on 100 feet below the deepest depth drilled, which is quite common and easy to negotiate
There is a problem with your information or the landman has an unusual definition of a “Pugh” clause. The purpose of the Pugh is to limit the lease beyond the primary term to the producing formation. It can also apply additional horizontal and vertical limits. You are dealing with a highly technical clause and would be best served if you have a professional review the entire proposed OGL.
If a company drills a well 20,000 ft and they only get production at say 10,000 ft then they would still be able to hold down to the base of 100 ft. below the 20,000 depth. NOT on my dime they won’t! The 100 ft. below the “deepest depth drilled” would be in another formation.
Thank you Martha. Your answer is really helpful and I appreciate your response. Do I need an attorney to draw this up or could I submit a new Pugh clause with the new language you’ve suggested? Jo
Thank you so much for your help. I will look for a professional who can help me. Any recommendations for West Texas OGLassistance?
Thank you Mr. Garner for your explanation. It sounds like I need an OGL attorney in West Texas. This has been very helpful.
Thank you Mineral Owner. This helps me. I am beginning to understand better about the depth issue. For clarification, it would be acceptable to agree to 100ft below deepest depth drilled, as long as it’s not a new formation? Thank you for your patience. I’m new at this.
I prefer 100’ below the deepest depth perforated and producing. They can sometimes drill deeper and then pull up the hole to produce, so you want the minimum amount and they want the maximum amount.
Does, “100’ ABOVE the deepest depth perforated and producing” matter at all. Is it necessary or even applicable? Or is it just “below” that matters?
The Landman told me it was to my benefit and to the drilling company to have the lease 100 feet below the formation because it keeps someone else from drilling and possibly ruining the well , thus the possible royalties. Is that true?
@Lucyben1915 It is certainly to the benefit of the drilling company, not so much to the mineral owner. Depth clauses can be a useful part of OGL negotiations, but a well structured Pugh clause is the best option. There are State regulators for the purpose of development conflicts between operators, so “ruining a well” is not much of an argument by the landman.
Most companies will not allow a 100’ above because they are drilling down to their zone of interest and want to be able to complete anything they see on the way down.
There is some nuance to this area that may require more detail than standard application of a Horizontal Pugh clause. A good lease should contain both: (People often reverse this but the AAPL defines it as)