What is meant by the term “depth clause” in an oil lease. Thanks
You can google this, but I think it provides that at the end of the primary term of the oil and gas lease, all rights at a specified formation will revert to landowner.
The vertical “pugh” clause typically reads something like “at the expiration of the primary term of the lease, any depth deeper than xxx feet below the deepest depth drilled will be released”. Basically, it serves to have those depths released back to the owner for future leases/drilling, very similar to the horizontal “pooling” clauses.
I think one of the worst mistakes a mineral owner can make is agree to a vertical pugh clause that says "at the end term the lesse agrees to release everything from 100 ft. below the deepest depth drilled! If a company drills a 22,000 ft well and produces it at 6,000 ft. They have everything down to the 22,000 ft. They are HBP ing practically everything. If you are going to sign this then you might as well go ahead and gift them the minerals. You have sold your minerals for the price of the bonus money if they get production.
Hi Walter,
If you still have my number please give me a call. If not, email me and I will give it to you again. Also would you mind defining HBPing to the gang. I've never seen that term before. Thanks in advance,
Yours,
Wes
Walter Stewart said:
I think one of the worst mistakes a mineral owner can make is agree to a vertical pugh clause that says "at the end term the lesse agrees to release everything from 100 ft. below the deepest depth drilled! If a company drills a 22,000 ft well and produces it at 6,000 ft. They have everything down to the 22,000 ft. They are HBP ing practically everything. If you are going to sign this then you might as well go ahead and gift them the minerals. You have sold your minerals for the price of the bonus money if they get production.
I agree: never deepest depth drilled; rather, something like “100 feet below the depth of casing set in the well/unit” that is absolutely determinable (a) strata/formation depth can be hard to define … on the Tx Gulf Coast, the “Wilcox” is thousands of feet thick, etc. … a strata/formation perf’d 9,058-9,068’ from a logged section 9,056-9,080’ is confusing isn’t it? (b) all depths should be defined as “True Vertical Depth” (TVD) rather than TMD (Total Measured Depth_
Walter Stewart said:
I think one of the worst mistakes a mineral owner can make is agree to a vertical pugh clause that says "at the end term the lesse agrees to release everything from 100 ft. below the deepest depth drilled! If a company drills a 22,000 ft well and produces it at 6,000 ft. They have everything down to the 22,000 ft. They are HBP ing practically everything. If you are going to sign this then you might as well go ahead and gift them the minerals. You have sold your minerals for the price of the bonus money if they get production.
What are your thoughts on using the term: Below deepest producing formation ? At least if they are drilling down deeper just to hold your lease, they would have to hit oil to do hold the lease, right?
Walter Stewart said:
I think one of the worst mistakes a mineral owner can make is agree to a vertical pugh clause that says "at the end term the lesse agrees to release everything from 100 ft. below the deepest depth drilled! If a company drills a 22,000 ft well and produces it at 6,000 ft. They have everything down to the 22,000 ft. They are HBP ing practically everything. If you are going to sign this then you might as well go ahead and gift them the minerals. You have sold your minerals for the price of the bonus money if they get production.
For the gang, HBP means held by production. A lease that is held by production does not expire at the end of its term.
I would say you don't want to mention formation. I would say 100 feet below the lowest perforation. In ND if the operator is producing the Bakken all he has to do is say that the Bakken and Three Forks communicate and he holds the lower Three Forks formation also. How would you prove he was wrong? However many feet below the lowest perforation I think would take the ambiguity out of it.
RM said:
What are your thoughts on using the term: Below deepest producing formation ? At least if they are drilling down deeper just to hold your lease, they would have to hit oil to do hold the lease, right?
Walter Stewart said:I think one of the worst mistakes a mineral owner can make is agree to a vertical pugh clause that says "at the end term the lesse agrees to release everything from 100 ft. below the deepest depth drilled! If a company drills a 22,000 ft well and produces it at 6,000 ft. They have everything down to the 22,000 ft. They are HBP ing practically everything. If you are going to sign this then you might as well go ahead and gift them the minerals. You have sold your minerals for the price of the bonus money if they get production.