Pugh Clause vs. Continuous Development Clause?


#1

We are negotiating a lease. The Lessor wants a CDC while we prefer our Pugh Clause. What’s the difference between the two? What are your suggestions?

Thanks.


#2

Rick, CDC charts out a timeline for them to develop or lose the lease. A pugh clause releases acreage not within defined units and formations. I’d get both or wouldn’t sign the lease.


#3

Thanks for your response Net_Revenue_Acre. The problem is the company is threatening to file for compulsory pooling and we suffer the 300% penalty for not leasing, or we could become working interest owners which we don’t want to do. Much rather lease then hire attorneys, CPA’s etc. that a working interest requires. Not to mention the expense. Could we contest the compulsory pooling application at the hearing?


#4

Hmmm that is an interesting situation… I’d try to negotiate limiting the lease to only the formation they are intending to drill and put a CDC in there. That way they are getting what they are paying for, without the upside, and also a timeline is created to drill the acreage. Personally, the last thing I would want is my acreage held for the rest of my life by a mediocre vertical well. It is definitely worth your time to hire a good NM attorney familiar with compulsory pooling.


#5

@Rick5

Have you already been pooled? This leaves you with little room for negotiations.

If you haven’t been pooled, why not lease to an operator who’s willing to give you the terms you want instead of the current operator you’ve been negotiating with?

Hope this helps.


#6

Haven’t been pooled yet…only one Operator is trying to negotiate a lease. Steward Energy 2 is the company wanting to lease and hopefully do the drilling. We are waiting for them to accept our Pugh Clause in our addendum. If not we become WI owners again…no way are we going to not participate and suffer a 300% penalty!


#7

Can you please explain how you suffer the 300% penalty as an unleased mineral owner?


#8

In NM pooling situation: If you choose not to sign a lease, and then you refuse to participate in the well at your proportional cost as a working interest owner, the operator will get to recoup their costs (on your share) and then get to recoup up to an additional 200% penalty since they took on all of the cost/risk of drilling the well. Effectively the well has to produce net revenue equal to 300% of its cost before the non-consenting WI owner gets their share of the revenue (going forward). That’s not great for the mineral holder.

Basically in a high risk penalty state like NM, you either sign a comparable market value lease, or the NMOCD is fine with you getting kicked in the nuts. They want the minerals developed. Makes total sense to me, but then have been on the operator side most of my life. Sign a lease. Don’t be the last one to sign a lease.

I don’t see much reason for a 3rd party (i.e. the non-operator) to give you a lease with favorable CDC/pugh terms as they will have no control over that.