I own minerals in 3 different sections in ND. The company I have leased to has a permit to drill in a month on the 1280 acre spacing unit of which I have 40 acres. 720 of my acres are located In the 1280 acre spacing unit next to it, and they have no plans of drilling that I know of before my lease expries in May 2011. I'm concerned that my 40 acres will tie up most of my minerals and I won't be in a position to lease again.
My pugh clause reads: "This lease shall terminate at the end of the primary term as to all of the leased premises except those included within a production or spacing unit prerscribed by law or administrative authority on which is located a well producing oil and/or gas, unless lessee is then engaged in drilling or reworking operations in accordance with the provisions of this lease. In the event that lessee is engaged in said drilling or reworking operations at the expiration of the primary term, the lease shall remain in full force and effect as to all the leased premises so long as a continuous drilling program is maintained whereby not more than 120 days shall elapse from the completion or abandonment of one well to the commencement of another well. Upon failure to maintain said continuous drilling program, this lease shall then automatically terminate as to such nonproductive part of the leased premises as provided above."
I have a question for any North Dakota Legal Guru.
Mr. Peterson quoted a portion of his lease as follows:
"...administrative authority on which is located a well producing oil and/or gas..."
If the preamble to the clause read something to the effect, "Notwithstanding anything to the contrary contained herein, the typewritten provisions take precedent over the printed provisions..." does that mean what the clause says, namely ACTUAL production must be occurring at the end of the primary term to throw the lease into the secondary term? If that is the case, the landman who prepared the clause might have shot his client in the foot, if they cannot drill the well and get it online in time.
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.
How refreshing to read and enjoy an erudite thought process. That was pretty much my take too -- and I would look into what perpetuated the lease in the habendum clause, operations or production and then look at cessation of operations language. There are a lot of moving pieces to this puzzle.
Thanks so much for your thoughts.
Dusty said:
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.
.... 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.
Yes Buddy, I agree the other (apparently unmodified) clauses you mentioned also must be looked at. These types of situations are usually the most complex of any to analyze. It’s usually best if the lessee doesn’t wait until the last minute to conduct operations (and nobody therefore ever has to wonder if the lessee is getting away with extending the primary term when it isn’t allowed under the language or is breaching the pugh clause), but that isn’t the case a lot of times. When the case isn’t clear cut either way, the choice is to either litigate or just forget about it.
Buddy Cotten said:
Dear Dusty,
How refreshing to read and enjoy an erudite thought process. That was pretty much my take too -- and I would look into what perpetuated the lease in the habendum clause, operations or production and then look at cessation of operations language. There are a lot of moving pieces to this puzzle.
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.
.... 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.
There is a Texas case where the lease terminated and the lessee kept paying royalties for over 30 years and after discovery by the lessors, the issue was litigated and the court held that the lessee adversely possessed the leasehold estate.
With sloppy pugh language like this one, and a quickly evolving oil industry, this may well become litigated in ND as well.
Yes Buddy, I agree the other (apparently unmodified) clauses you mentioned also must be looked at. These types of situations are usually the most complex of any to analyze. It's usually best if the lessee doesn't wait until the last minute to conduct operations (and nobody therefore ever has to wonder if the lessee is getting away with extending the primary term when it isn't allowed under the language or is breaching the pugh clause), but that isn't the case a lot of times. When the case isn't clear cut either way, the choice is to either litigate or just forget about it.
Buddy Cotten said:
Dear Dusty,
How refreshing to read and enjoy an erudite thought process. That was pretty much my take too -- and I would look into what perpetuated the lease in the habendum clause, operations or production and then look at cessation of operations language. There are a lot of moving pieces to this puzzle.
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.
.... 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.
Thanks for your responses on this subject. I value your opinions and didn't realize how complex leases can get. Unfortunately most of us leaseholders learn as we go and then it's too late to go back and redo things.
PART II. I've been contacted by 3 companies wanting to top lease which I've been inclined to do. However IF this potentially ends up in litigation between 2 companies would it be wise to top lease? And if I did top lease, and the company that paid me to top lease came out the loser, is it possible that I would have to repay the bonus?
To learn as you go -- gaining experience, is certainly one way to learn. However, experience is many times a brutal taskmaster and the painful consequences of the lesson will long be remembered. OH boy, do I know this personally!
With the value of these assets, I do not know why anybody would not want professional representation.
As to your question, if the top lease was done correctly and did not violate the rule against perpetuities and you had proper language in the top lease, you would not be responsible for the repayment of any dollars.
Terry Petersen said:
Mr Cotton & Mr Dusty,
Thanks for your responses on this subject. I value your opinions and didn't realize how complex leases can get. Unfortunately most of us leaseholders learn as we go and then it's too late to go back and redo things.
PART II. I've been contacted by 3 companies wanting to top lease which I've been inclined to do. However IF this potentially ends up in litigation between 2 companies would it be wise to top lease? And if I did top lease, and the company that paid me to top lease came out the loser, is it possible that I would have to repay the bonus?