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What to know about the Pugh Clause in an oil and gas lease

On Behalf of | May 2, 2024 | Oil & Gas Law

The Pugh Clause is important for both lessors and lessees in oil and gas leases. This contractual provision addresses the issue of lease termination and rights to undeveloped portions of the leased land. 

Here’s what you need to know about the Pugh Clause

Its purpose

The Pugh Clause, named after the Louisiana landman who first advocated for its inclusion, aims to prevent leaseholders from indefinitely tying up large swaths of land without actively exploring or developing them for oil and gas extraction. It ensures that undeveloped portions of the leased property revert to the lessor, allowing them to lease these areas to other parties or negotiate more favorable terms.

Termination of non-producing portions

One of the primary functions of the Pugh Clause is to allow for the termination of non-producing portions of the leased land while maintaining the lease on productive areas. When certain parts of the land are not producing oil or gas, the Pugh Clause enables the lessor to reclaim these sections, freeing them up for future leasing or development opportunities.

Depth and acreage provisions

Pugh Clauses typically include depth and acreage provisions that specify the criteria for determining which portions of the leased land remain under the lease and which revert to the lessor. Depth provisions establish the vertical extent of the lease, while acreage provisions define the horizontal acreage retained by the lessee based on active production.

Pugh Clause plays a vital role in oil and gas lease agreements, serving to balance the interests of lessors and lessees while promoting responsible land development and resource extraction. Understanding its provisions and implications is key to navigating lease negotiations and ensuring a mutually beneficial agreement.