In 1947, a Louisiana lawyer with the last name of Pugh represented Shell Oil in a dispute over an oil and gas lease contract. The Supreme Court ruled in favor of Pugh and the result was a new way of developing oil and gas lease contracts with a stipulation known as the Pugh clause. Below, Adam Ferrari breaks down the Pugh clause and how it affects oil and gas leases.
The Pugh Clause Defined
Oil and gas leases are complicated documents filled with various clauses and stipulations. Likewise, the Pugh clause is tricky to nail down as it does not have a standard format. Each Pugh clause is different, but most Pugh clauses are either specified as horizontal, in which property is assessed mostly by an area measured in acres, or vertical, in which the property is assessed by the depth that the producing well bore(s) was drilled to. Depending on the area that needs to be leased, it may be more beneficial to require one measurement method over the other.
What many oil and gas professionals fail to understand is that these clauses will limit the amount of property that can be used by the lessee after the initial lease term expires. A vague or poorly written Pugh clause can result in benefits being leveraged towards the lessee in the court of law. An experienced property owner will be up to date with all the current oil and gas lease information so that they can be well represented during negotiations and gain as much value as possible from the land in question.
Know the Laws and Negotiate Legal Claims
Understanding the Pugh clause is one of the first steps in understanding a complicated oil and gas lease. The more a property owner knows of the complexities of typical oil and gas leases, the more they will be able to fight for their rights and protections in court should a dispute arise, which does happen from time to time in oil and gas.
A landman must consider the available options to make an informed decision regarding what lands the oil company will be able to legally develop, and the Pugh clause is an essential factor. An experienced landman may negotiate better terms for the existing Pugh clause that tilts benefits to their favor. An existing clause may be revisited and revised when title research reveals that the lease is ending soon. In this case, the landman will often approach the mineral owner to renew the lease, effectively putting contract negotiation back on the table.
Understanding a Pugh clause can be difficult, as each Pugh clause is different and can mean different things. Thus, it is necessary to understand the legal implications involved in most Pugh clauses. This legal leasing tripwire tries to take land away from the lessee after the primary term of the original oil and gas lease has passed. Every landman should be well informed on typical Pugh clauses in order to craft the best possible oil and gas leases.
About Adam Ferrari
Adam Ferrari is the founder of the mineral acquisitions company Ferrari Energy. He is a chemical engineer by degree and is an accomplished petroleum engineer by profession. He also has experience in the financial sector through his work at an investment banking firm. Under his leadership, his company has supported numerous charitable organizations, including St. Jude Children’s Hospital, Freedom Service Dogs, Denver Rescue Mission, Coats for Colorado, and Next Steps of Chicago.