Pugh Clause
A lease provision that allows acreage not included in a producing unit to expire at the end of the primary term, rather than being held by distant production.
Detailed Definition
A Pugh clause (named after Louisiana attorney Lawrence Pugh) is a provision in an oil and gas lease that limits the lease's held-by-production (HBP) status to only the acreage included in a producing unit, allowing the non-unitized acreage to expire at the end of the primary term.
Why Pugh clauses matter: Without a Pugh clause, production from a single well on a portion of a large lease can hold the entire lease indefinitely, even if the operator has no plans to develop the remaining acreage. This can lock up mineral rights for decades.
How a Pugh clause works: - If a lease covers multiple tracts or sections - And production is established on only a portion of the leased acreage - The Pugh clause provides that only the acreage included in the producing unit is held by production - Non-unitized acreage expires at the end of the primary term - The mineral owner is then free to lease the expired acreage to another operator
Types of Pugh clauses
Horizontal Pugh: - Releases non-unitized surface acreage from the lease at the end of the primary term - Most common type of Pugh clause
Vertical Pugh (depth severance): - Releases depths or formations not included in a producing unit - Allows the mineral owner to lease deeper (or shallower) formations to another operator
Significance for mineral owners: Pugh clauses protect mineral owners from having their acreage tied up indefinitely by a single well on a large lease. They encourage operators to develop the entire lease or release acreage for others to develop.
Significance for operators: Operators must be aware of Pugh clauses when planning development, as failure to include all leased acreage in a producing unit may result in loss of the non-unitized portions.
Related Terms
Mineral Lease
A contract granting the right to explore for and produce minerals from a specific tract of land in exchange for rental payments and royalties.
Primary Term
The initial fixed period of an oil and gas lease during which the lessee must begin drilling or production to maintain the lease.
Held by Production
An oil and gas lease that continues beyond its primary term because of ongoing production from the leased premises.
Depth Severance
The division of mineral rights by depth, where rights above a specified depth are separated from rights below that depth.