Held by Production

A lease is said to be held by production (HBP) when it continues past its primary term because oil or gas is being produced.

The federal rule

• 30 U.S.C. 226(e): each federal lease "shall continue so long after its primary term as oil or gas is produced in paying quantities."
• 43 CFR 3107.21: "A lease will be extended so long as oil or gas is being produced in paying quantities."
• Production through an agreement counts. Under 30 U.S.C. 226(m), operations or production under a communitization agreement "shall be deemed to be operations or production as to each such lease committed thereto." Under 43 CFR 3107.31(a), a lease committed to an agreement that allocates production "will continue in effect so long as the lease or portion thereof remains subject to the agreement; provided, that there is production of oil or gas in paying quantities under the agreement prior to the expiration date of such lease."

When production stops

• 43 CFR 3107.22: a lease in its extended term "will not expire upon cessation of production, if, within 60 calendar days of cessation of production, reworking or drilling operations on the leasehold are commenced and are thereafter conducted with reasonable diligence." If they fail, "the lease will expire by operation of law, effective as of the date paying production ceased."

What "paying quantities" means depends on the document

The federal model unit agreement in 43 CFR part 3180, appendix A, uses "quantities sufficient to repay the costs of drilling, completing, and producing operations, with a reasonable profit." The Utah SITLA lease form defines it differently, as production "sufficient for Lessor to receive royalties in an amount at least equal to twice the highest annual rental provided for in paragraph 3 of this Lease during a Lease year." The test that applies is the one in the governing lease, agreement, or law.

How much land production holds

Whether production from one well holds the whole lease or only part of it depends on the lease and on state law. Oklahoma limits it by statute: "In case of a spacing unit of one hundred sixty (160) acres or more, no oil and/or gas leasehold interest outside the spacing unit involved may be held by production from the spacing unit more than ninety (90) days beyond expiration of the primary term of the lease" (52 O.S. 87.1(b)). Lease clauses that do the same are covered under Pugh Clause.

Why it matters in mineral title research

• HBP status is a factual conclusion. It rests on production records for the lease or unit, the dates production ceased, and any operations or payments in the gaps.
• Production from a unit or communitized area may hold a lease with no well on it, so the agreement and its lands have to be identified.
• Acreage outside the producing unit may have expired by statute or by clause even though the lease as a whole is called HBP.