These are fact intensive inquiries, and they now are complicated by open questions of law regarding the effect of multiple well pads and fracing delays. This is my take on the provision which may or may not be correct.
If there is a completed well producing from a permanent wellhead on or before the lease expiration date on any spacing unit -- and absent drilling operations on any other unit containing lands under the lease --, the lease terminates as to lands not included within the unit that contains the producing well. Note that the lease in this regard does not state "a well capable of producing," which is a more liberal standard for allowing the pugh clause to be invoked, and which therefore would be more risky for the lessee in that the lessee would lose the other acreage outside of the unit containing the well capable of producing on the expiration date (absent drilling operations on a second unit).
Under the provision in question, if there is no such producing well on any unit at lease expiration, but the lessee is then drilling on any unit, or has drilled a well that is awaiting frac (i.e., a well capable of producing), all the land is held until at least 120 days after that first well is completed or plugged. If the lessee does not commence drilling on a second unit within that 120 day period, the land not within the producing unit (assuming the first well is a producer) is no longer subject to the lease.
As far as I know it is an open question regarding whether a well awaiting frac at the time of lease expiration will hold the lease. My guess is that the lessee would argue that it falls under reworking operations (although the term applies to most any type of work, it technically usually refers to operations to bring a well back into production). My further guess in such a situation is that a court would require that the lessee would have had to have ordered the frac either while the well was drilling or immediately after drilling had concluded, and that the first available frac date be utilized.
In other words, time is of the essence in completing a well when the lessee wants to extend the primary term with drilling or reworking operations, and such operations must be diligently prosecuted. A few years ago, before fracing became the norm in these resource plays, a vertical well could be completed in a week or two after drilling concluded. Now it can take months to get the well fraced and completed after drilling is concluded. When a well is completed (not finished drilling) is the event that triggers the 120 day clock, so delays in completing the first well obviously leads to a longer overall extension of the primary term, and thus the period when a second well is required to be commenced.
Another open question is whether drilling a second well on the same pad (which has the horizontal portion of the well bore in an adjacent unit) constitutes "drilling operations" to extend the primary term of a lease in the unit where the pad and rig is located, but where such lease does not pertain to any land in the unit where the producing portion of that second well bore lies. It's only a matter of time before these issues reach the courts and answers are provided.
