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How long does a lease last?
Generally there is a “Primary Term” specified in the
lease, for instance, three (3) years, and as long thereafter as oil and gas
is produced, or for as long as the lease may be maintained in force and
effect under other terms and provisions of the lease.
The above example would indicate that the lease is for
3 years from the effective date, and if there was no drilling or production
from the land covered by the lease at the end of the primary term, then the
lease would terminate. However there are numerous clauses that modify
and/or allow the Lessee to extend the term of the lease beyond the stated
primary term, or alternatively, the primary term can be shortened and the
mineral estate will revert back to the mineral owner. Some of these common
clauses are discussed below.
Commencement of Operations & Delay Rental
A common lease requirement is unless the Lessee
starts operations for exploration, usually within 1 year, or pays to
the Lessor, a specified “Delay Rental” for the right to extend the time for
commencement of operations, for 1 year, then the lease automatically
terminates.
Many leases are “Paid Up Leases”, which means that the
time required for commencement of operations is the same as the primary
term, and no annual delay rental payments are required to maintain the
lease.
Shut-In Provisions
If a well has been drilled, and is capable of
producing, but is not being produced, for various reasons, i.e. lack of
market, lack of pipeline connection, then the Lessee would have the right to
pay a Shut-In Royalty, which is deemed to be production, and will hold the
lease effective, just as if actual production were being made.
Pooling
Pooling is the right of the mineral owner to combine
their mineral estate with that of adjoining mineral estates to create a pool
that apportions the production from anywhere in the pooled acreage to all of
the pooled acreage, based upon the ratio of each owners surface acreage to
the total pooled acreage. This right must be specifically assigned to
the Lessee, or the mineral owner must join in designating or ratify the
pooled unit.
Force Majeure
This is a right of the Lessee to claim that forces
beyond the Lessee’s control, are preventing them from fulfilling their
obligations to develop the lease lands, and stops the running of time
factors within the lease, for as long as the Lessee is prevented from
resuming operations. Generally will come into play only at the end of the
primary term, and afterwards if production ceases and Lessee is required to
resume operations within a set time frame in order to prevent the lease from
terminating.
Continuous Development
An example of a continuous development clause, would
require the Lessee to continue to drill successive new wells, on a set time
frame, with the purpose of fully developing all of the leased lands. At the
point that the Lessee failed to continuously drill, for example with no more
than 90 days between completion of one well and the start of the next well,
especially after the end of the primary term and with a lease with severance
clauses, then the lease would terminate as to all acreage that was not
included acreage for each well that was producing at that time.
Severance
Generally, the parties have agreed that after the end
of the primary term, or at a time of termination of part of the lease, that
the Lessee can hold only a specified number of acres around each producing
well, for example 40 acres around each oil well & 320 acres around each gas
well, and must release all acres not included with each well. In addition
to the above described vertical severance, many leases include horizontal
severances, for example the Leasee may hold only 100 feet below the deepest
producing horizon or formation, and all zones below that are released,
sometimes called the “Deep Rights”, and allows the mineral owner to lease
those mineral rights to another exploration company.
Each oil and gas lease is different, as the clauses and
covenants negotiated between the parties, can have differing effects based
upon the words chosen. It may be easy to determine that an oil and gas
lease executed on January 1, 2000 with a 3 year primary term, that on
January 2, 2003 absent any drilling activity or production attributable to
the lands covered by the lease, then the lease has probably terminated on
its own terms. Ideally, the mineral owner will secure a recordable release
from the current Lessee, and file it of record. More frequently, there
is/was production, or part of the acreage was included into a unit, or all
or part of the leasehold has been assigned to other parties, thus to
determine the current status of the mineral estate, a careful review of all
of the facts and documents of record are required.
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