Oil/Gas/Vertical and Horizontal Pugh Clauses
Should one request both vertical and horizontal Pugh clauses be included in terms of lease? I found the following examples:
Horizontal Pugh Clause
Notwithstanding anything to the contrary, it is agreed that should Lessee exercise his option to pool or combine any portion of the land covered hereby with other lands, lease or leases as hereinbefore provided, then such operations and production on and in any such pooled unit as herein provided, shall continue this lease in force and effect during or after the primary term as to that portion of the lands covered by this lease, included in such unit or units as hereinabove provided, but not as to such portion of said lands covered by this lease and not included in any such unit. This lease maybe kept in force and effect as to such remainder in any manner elsewhere provided in this lease not inconsistent with this paragraph
Vertical Pugh Clause
It is understood and agreed that one (1) year after the expiration of the primary term of this lease, upon the expiration of any extension or renewal, or after cessation of operations as provided herein, whichever occurs last, Lessee shall release all rights lying below the stratigraphic equivalent of one hundred feet (100') below the base of the deepest producing formation in any well drilled on the leased premises or on lands with which the leased premises has been pooled or unitized.
Yes, you should request both to be in your lease IF you have more than 40 acres under lease.
The purpose of a Horizontal Pugh Clause is to limit the amount of acreage that can be held by a producing well. If an oil company has one producing unit of 40 acres for a vertical well and they have placed all your acreage in the producing unit then you are fine. If you have 2000 acres and the oil company has only one producing well they should not be able to hold all 2000 acres for the duration of that producing well. You could have someone else out there drilling wells on that acreage.
The purpose of a Vertical Pugh Clause is for the oil company to not hold any production zones deeper than the deepest producing perforation after the end of the primary term. If the oil company is producing oil at 5000' and they have not initiated any operation to produce a deeper zone prior to the end of the primary term then they have to release everything below the 5,000' plus 100' back to you so you can lease it to someone else.
A vertical pugh clause should be in EVERY lease without regard to the number of acres you own but the Horizontal is for those larger acreage leases. I prefer to suggest smaller individual leases for large acreage positions. Separate the leases based on legal description with a separate lease on each 80 acres or so. Some oil company will not do this but it is a good place to begin bargaining for the pugh clauses.