Title Examination Series:Pugh Clauses/Retained Acreage Provisions/Depth Severances

It surprises me the number of title attorneys who do not really understand Pugh clauses. I often encounter attorneys who mistakenly think that a retained acreage provision is a Pugh clause. They think that any provision resulting in acreage being released after production has to be a Pugh clause. A Pugh clause is a type of retained acreage provision that is only applicable with regards to pooled/unitized lands. A Pugh clause is completely inapplicable when there has been no pooling.

The following is a typical retained acreage provision:

At the expiration of the primary term of this lease or at the end of the extended period for continuous development provided below, whichever is later, this lease shall terminate SAVE and EXCEPT for (i) eighty (80) acres of land plus a tolerance of ten percent (10%) surrounding each vertical well, and (ii) six hundred forty (640) acres plus a tolerance of ten percent (10%) around each horizontal well.

The following is a very simple Pugh clause:

Operations on or production from a pooled unit or units shall maintain this lease in force only as to lands included within such unit or units.

This clause specifically provides for the retention of lands in the event of pooling. If there is no pooling, this clause is not applicable.

Quite often the retained acreage provision will also include a Pugh clause.

At the expiration of the primary term of this lease or at the end of the extended period for continuous development provided below, whichever is later, this lease shall terminate SAVE and EXCEPT for (i) eighty (80) acres of land plus a tolerance of ten percent (10%) surrounding each vertical well, (ii) six hundred forty (640) acres plus a tolerance of ten percent (10%) around each horizontal well, and (iii) all lands included in a pooled unit.

In addition, there is often confusion about what is a horizontal Pugh clause and what is a vertical Pugh clause. If you do an internet search on horizontal or vertical pugh clauses, you will find numerous instances of conflict and confusion. However, legally, a horizontal Pugh clause is one that provides for retention of depths or strata based upon pooling and production, it is a specific type of depth severance provision. A vertical Pugh clause is based upon surface divisions and is what is commonly meant when one just references a Pugh clause, with no further description or limitation.

Horizontal Pugh clauses, like the one at issue, are relatively recent innovations in oil and gas leases, but they serve the same purposes as the more established vertical Pugh clause. In juxtaposition to its vertical counterpart, the horizontal Pugh clause makes a horizontal division of property subject to the lease. As with the original vertical-oriented clause, its purpose is to foster reasonable development of the property burdened by the lease. Stated more simply, if one leases property for oil and gas development, one should develop it during the agreed time or let it go.

Sandefer Oil & Gas, Inc. v. Duhon, 961 F.2d 1207 (5th Cir. 1992)

In general, a horizontal Pugh clause holds a lease only to the stratum or level from which production has been secured in the unit during the primary term of the lease and, thus, frees the mineral interests below that depth absent additional development. (citations omitted).

Community Bank of Raymore v. Chesapeake Exploration, L.L.C., 416 S.W.3d 750 (Tex.App.-El Paso 2013).

The following is a simplified depth severance provision that is also a horizontal Pugh clause.

At the expiration of the primary term of this lease or at the end of the extended period for continuous development provided below, whichever is later, this lease shall also terminate as to all rights, strata and horizons situated below one hundred feet (100’) below the stratigraphic equivalent of the deepest depth drilled in a well or wells drilled, producing and located on the leased premises or on lands pooled therewith.

A title examiner should note the existence of a retained acreage provision and/or Pugh clauses, and the key terms. A title examiner should not just pay attention to what lands are retained or released, but also the triggering events. A lease analysis should note any inherent conflicts between the pooling authority, any Pugh clauses, and any retained acreage provisions. It is not impossible for a lease to allow you to pool a certain amount of acreage, but not be able to maintain the lease as to all such acreage upon triggering of the Pugh or retained acreage provisions. Such a conflict should be corrected through a lease amendment.

In addition, because of the confusion and misuse of the descriptors of Pugh clauses, I find that it is beneficial to identify a horizontal Pugh clause as a “Horizontal Pugh Clause/Depth Severance Provision,” and a vertical Pugh clause as a “Vertical Pugh Clause/Retained Acreage Provision.”