Continuous Drilling Clause

A continuous drilling clause, also called a continuous operations clause, keeps an oil and gas lease in force while drilling or reworking goes on, even without production. The examples below each limit how long operations may stop. The wording, the allowed gap, and what counts as operations all come from the lease or the statute that governs it.

Texas: state public school and Gulf land leases

Tex. Nat. Res. Code 52.023 requires each such lease to provide that:

• if production ceases after the primary term, "the lease will not terminate if the lessee commences additional drilling or reworking operations within 60 days after the cessation of production";
• "the lease shall remain in effect as long as drilling or reworking operations continue in good faith and in a workmanlike manner without interruptions totaling more than 60 days."

Utah: the SITLA lease form

The Utah SITLA oil and gas lease form allows the lease to continue past the primary term while the lessee "is engaged in diligent operations" approved in writing by the lessor and pays an annual minimum royalty. It sets its own limit: "Any cessation of operations for a period of more than ninety (90) consecutive days or a cumulative period of one hundred eighty (180) days in any one calendar year will be conclusive evidence that Lessee is not engaged in diligent operations."

Federal leases

Federal law uses operations in three places.

• Drilling at the end of the primary term: a lease on which "actual drilling operations were commenced prior to the end of its primary term and are being diligently prosecuted at that time shall be extended for two years" (30 U.S.C. 226(e)). 43 CFR 3100.5 defines actual drilling operations to include "not only the physical drilling of a well, but also the testing, completing or equipping of such well for production."
• The standard: operations must be conducted "in a manner that a reasonable person seriously looking for oil or gas could be expected to make in that particular area," and a new well must reach "at least one formation recognized in the area as potentially productive of oil or gas" (43 CFR 3107.10(b)).
• After production stops: reworking or drilling commenced "prior to or within sixty days after cessation of production" and "conducted thereon with reasonable diligence" keeps the lease from terminating (30 U.S.C. 226(i)).

Why it matters in mineral title research

• A lease kept alive by operations has no production record to prove it. Drilling permits, spud and completion dates, and well files are the evidence, and the gaps between wells have to be measured against the limit in the lease or statute.
• A single gap longer than allowed can end the lease, so the dates matter more than the number of wells.
• The clause may interact with a Pugh clause or a unit agreement, which can change what land the operations hold (see Pugh Clause and Unitization).