What kind of clause is this? Vertical Pugh clause?


We are currently negotiation a lease. We told them we wanted to copy the exact lease we had last time that our lawyer drew up. However, they are asking us to take this section out this time. Can someone tell me if this is the Vertical Pugh Clause or something else? !

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I really don’t want to pay a lawyer again.

It has the semblance of both a horizontal and a vertical Pugh clauses in it and no wonder they want to take it out and you want it to stay in. You would need to post which state you are in as to the naming of which clause is which. The type of well that they might want to drill may lead you to give up on one of them and keep the other. Need a bit more information in order to answer. Personally, I would keep them both, depending upon the state.

Thank you so much for your quick reply. I’m in East Texas/Smith County. Just for stats purposes in case anyone else is in my area… We are at $325 per mineral acre. 20% interest and a 3 yr lease with 2 year option at this point. Started at $300/ 18% interest and a 5 yr/2yr option. I believe the landman is coordinating with Valence. We have about 7 gas wells in operation on other property in the county that are operated by Valence.

Our part is a total of 20 acres. We are in no hurry or eager to sign anything so I will likely tell them it has to be included unless I discover there is a reasonable reason not to.

Depending upon the state, the Pugh clauses are essentially a “biscuit” or a “pancake”. Several states use opposite definitions for Vertical or Horizontal Pugh clauses. Visual approach helps me more. The “biscuit” approach says out of all of my acres, the operator XYZ Co can only save this many acres and you have to release everything outside of those acres within a certain time frame. Biscuits cuts straight down, so all strata is included. Think a rancher with 10,000 mineral acres with multiple possible reservoirs. He/she leased them all to XYZ Co and they drilled a well that had 1000 acres in the spacing unit and they targeted zone 7 out of ten zones. You do not want XYZ to save all 10,000 acres with that one well, so you write the clause so that they will release the other 9000 acres. AND you also don’t want them to keep all nine other zones if they are only producing out of zone 7. You need the other Pugh clause as well.

The other clause is the “pancake” clause. This clause says to XYZ, you have to release all the horizons in the biscuit below a certain horizon (Zone 7) at a certain distance from the horizon base. And if you are lucky, you can get an upper clause that says XYZ has to release all the horizons above the named horizon in the biscuit at a certain distance above the top of the producing horizon.

The best clauses for the mineral owner are a combo of the two. XYZ can lease my acreage from the surface of the earth to the center of the earth, but must release all the acres except for the xxx spacing acres and release all the horizons above and below the producing formation. If they are written well, then the operator has to come back and lease you (and pay a bonus) for every zone that they want to drill. From their point of view, that is what they do not want to do. They want to lease all of your acres and keep all of your zones.

I will let folks near you comment on the bonus amounts, but just in general, I do not like any option to renew clause as that gives the operator too much power. But if that is the only way to get a lease, then make them pay more for the option years. As we have seen this past year, too much can happen in just a year to tie yourself up for five years.

Thanks again for such a detailed reply.

Our lawyer said the same thing about renewal options! Honestly, I just wish they would try and drill something. This has been going on for about a decade.

I’m just going to insist the clause stays in. I’ll followup when I’ve got an update.

M Barnes gave you some good information on the reasoning behind Pugh clauses.

Did the landman give any explanation why his folks want that provision deleted? I’m wondering if they are saying it’s unreasonable for a lease to include a Pugh clause, or possibly their objection is to that particular wording?

The depth severance aspect can be a sticking point sometimes, but it’s been a long time since I’ve run into a company that objected to adding a basic Pugh clause to a lease. From my non-lawyer viewpoint, the way that provision in your previous lease combines both the vertical and horizontal release concepts in one provision isn’t a very common approach.

You didn’t say how much acreage this lease would cover and that could make a difference. But, if you are satisfied with everything else they are offering, before deciding to slam the door, you might try telling their landman that you aren’t willing to sign without having a Pugh clause but if they have alternative wording on it they want to propose that you are willing to look at it. You could post their wording here and probably get some opinions on how it stacks up. If they just say, no Pugh clause period, this may not be the company you want to signup with.

Thank you for your thoughtful response. They ended up agreeing to the Pugh clause. I may come off a bit flippant, but there is some attempts at manipulation that irks me in the emails.

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