Title Examination Series:Continuous Drilling/Dry Hole/Cessation of Production Provisions

Continuous drilling/operations provisions, dry hole provisions and cessation of production provisions all set out various rights of the Lessee to maintain a lease beyond the end of the primary term when no oil or gas is being produced.

A continuous drilling or operations provision allows a lease to be maintained after the expiration of the primary term, as long as the lessee is drilling or conducting operations in conformity with the express language of the provision.

If at the expiration of the primary term, oil and gas is not being produced in paying quantities from said lands, but Lessee is then engaged in drilling operations thereon, this lease shall remain in full force and effect so long as drilling operations are prosecuted with due diligence and as long thereafter as oil or gas is produced from said lands.

This provision provides for operations conducted “with due diligence.” The better approach is to provide a specific period of time within which to resume operations.

If, at the expiration of the primary term, oil or gas is not being produced from the Leased Premises but Lessee is engaged in drilling operations thereon, this Lease shall remain in force as long as drilling operations on said well or drilling operations on additional wells are prosecuted in good faith toward completion of a commercial well with no cessation of drilling operations for more than ninety (90) consecutive days between the cessation of drilling operations on one well and the commencement of drilling operations on a subsequent well or wells, and so long thereafter as oil or gas is produced from the Leased Premises in paying or commercial quantities.

A dry hole provision establishes how much time an operator has to start operations on a subsequent well once a dry hole has been drilled during the primary term.

If Lessee shall have drilled a dry hole on the Leased Premises within ninety (90) days prior to the end of the primary term, then this Lease shall remain in force for a period of ninety (90) days after drilling operations on said dry hole have ceased and so long thereafter as drilling operations on a subsequent well or for drilling operations on any additional well or wells are prosecuted with no cessation of more than ninety (90) consecutive days between the cessation of drilling operations on one well and the commencement of drilling operations on subsequent wells and if they result in the production of any Leased Substance, so long thereafter as any Leased Substance is produced from the Leased Premises in paying or commercial quantities.

A cessation of production provision establishes how long after production has stopped an operator has to commence other operations in order to maintain the lease.

If, after discovery and production of oil and/or gas, actual production thereof or production in paying or commercial quantities should cease from any cause, this Lease shall not terminate if Lessee commences drilling operations within ninety (90) days after production ceases and continuously conducts drilling operations without cessation thereof for more than ninety (90) consecutive days between the cessation of drilling operations on a well and the commencement of drilling operations on a subsequent well and if they result in production in paying or commercial quantities of oil or gas, so long thereafter as oil or gas is produced from the Leased Premises in paying or commercial quantities.

A title examiner should identify any unusual provisions in such clauses and note any conflicts between the provisions.