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The Importance of a Pugh Clause in an Oil and Gas Lease

A property owner decides to lease 500 acres to an oil and gas company for a four year primary term to allow the exploration for oil and gas. The Oil and Gas Lease signed by the property owner does not contain a Pugh clause. During the primary term of the Lease, the oil and gas company places one well in the northeast corner of the real estate. Does that one well placed on the real estate during the primary term hold by production the entire 500 acres if the oil and gas company is able to produce oil from that well?

Without a Pugh clause, the general rule is that production from any of the land covered by the Lease will hold the entire 500 acres by production. In other words, even though the oil and gas company has only placed one well on the landowner’s property during the primary term, that one well will continue to hold the 500 acres of land.

A Pugh clause is utilized to limit the acreage that is held by one well to only the acreage that is within the production unit covered by that well. In other words, if the production unit held by one oil well is only 20 acres and the property owner’s Oil and Gas Lease includes a Pugh clause, the one well drilled by the oil and gas company during the primary term of the Oil and Gas Lease will only hold 20 acres by production, and the remaining 480 acres will be released from the Lease at the end of the primary term.

The inclusion of a Pugh clause in your Oil and Gas Lease is especially significant if you are leasing a significant amount of land to an oil and gas company under the Lease. The Pugh clause also has the added benefit of encouraging the oil and gas company to more quickly explore for oil and gas on your property.  A landowner would be well advised to include a Pugh clause in any Oil and Gas Lease executed by the landowner.