Oil and Gas Lease Clauses and Provisions Part 1

In our last post, we discussed the basics of the Oil and Gas Lease. Today we will discuss some of the finer points, provisions, and clauses of the lease.

Granting Clause: Usually, the opening paragraph of the lease is the granting clause. It outlines the purposes of the lease and describes the substances that can be explored and produced.

Duration: Both the Primary and Secondary Terms were discussed in yesterday's post and will not be rehashed here. However, there are three important provisions that should be discussed.

  • Shut-in Provision: Allows the lease to remain in effect whenever the production from a well capable of producing in paying quantities is not being sold. The lessee must pay shut-in royalties to the lessor to maintain the lease after the expiration of the primary term.
  • Dry Hole Provision: Will extend both the primary and secondary terms of the lease if oil and gas is not discovered when a well is drilled and certain conditions are met.
  • Cessation of Production: Will extend the secondary term of the lease if certain conditions are met.

Royalty Clause: Again, discussed yesterday.

Surface Damages: Unless stated otherwise, the granting of an oil and gas leases carries the implied right to use as much of the surface as in reasonable necessary for the development of the minerals. This is because the surface estate is subservient to the mineral estate.

Pooling Clause: A provision giving the lessee the right to consolidate the leased premises with adjoining leased tracts in order to meet the requirements for the state mandated size for drilling and spacing units. Pooling, both compulsory and voluntary, will be covered in a post at a later date.

Assignment Clause: A provision permitting the lessor and the lessee to assign their rights under the lease to other parties.

Warranty Clause: A clause requiring lessors to defend their interest in, or title to, the leased premises.

Force Majeure Clause: The clause that protects the lessor from liability and loss of the lease whenever an "Act of God" causes the lessor to suspend operations. These acts can range from a tornado to a terrorist attack to the unavailability of a drilling rig.

More to follow.

BR