The Pugh Clause (sometimes misspelled “pew clause”) is named after Lawrence Pugh, a Crowley Louisiana attorney who developed the clause in 1947, apparently in response to the Hunter v. Shell Oil Co., 211 La. 893 (1947). In this case the Louisiana Supreme Court held that production from a unit including a portion of a leased tract will maintain the lease in force as to all lands covered by the lease even if they are not contiguous.
Absent a Pugh Clause, a Lessor could be exposed to the entirety of the lands under an oil or gas lease being held by the production from a small portion of the lands covered by the lease being pooled or combined with other lands. If this scenario in fact developed, a Lessors’ only alternative was to attempt to find remedy through the implied obligation that the Lessee failed to develop and operate the property as a reasonably prudent operator. Forcing an implied obligation generally occurs through a lawsuit and is difficult to prove.
Therefore, the Pugh Clause made its appearance. The Pugh Clause has no “standard language” and there are as many forms as there are drafters to the form. The clause will only have the effects that are specifically provided for in the language itself.
Pugh Clause Protection
“If I have a Pugh Clause, am I protected?”, is a question we often hear. Maybe, is the answer. For example a Pugh Clause that begins: “If, at the end of the Primary Term, a portion or portions of the leased premises is pooled or unitized with lands as provided for in Paragraph 4 hereof, that are not a portion of the leased premises, so as to form a pooled unit or units, operations on, completion of a well upon, or production from such unit or units will not maintain this lease in force as to that portion of the leased premises not included in such pooled unit or units.” Note that the triggering event is the language “…pooled or unitized with lands as provided for in paragraph 4…”. Paragraph 4 provides that: “Lessee, at its option, is hereby given the right and power to pool or combine the acreage covered by this lease or any portion thereof as to oil and gas, or either of them, with any other land covered by this lease, and/or with any other land, lease or leases in the immediate vicinity thereof to the extent hereinafter stipulated…” The problem with this type of Pugh Clause is that there must be voluntary pooling for the Pugh Clause to have effect. What if you owned 2,000 acres and there was never any voluntary pooling performed on your tract? You would have no triggering event and thus one well would maintain your entire 2,000 acres as held by production.
Vertical Pugh Clause
Many times a Declaration of Pooling will stipulate the depth range being pooled. An example would be the following language: “…pool or combine lands from the surface of the earth to 7654 feet beneath the surface of the earth…” Does this mean that the normal Pugh Clause would require the release of deeper rights? Actually, there is case law on the subject and the answer is no. If you desire a release of the deep rights after discovery, that needs to be addressed as a separate issue in the lease form.
To be adequately protected, you need language providing for triggering by all types of unit establishment possibilities, even proration units, and should also include depth limitation language.
Pugh Clause Alternatives
An alternative to the Pugh clause where you never desire pooling on the oil and gas lease would be a retained acreage provision. We’ll address this in a forthcoming article.
Getting the Pugh Clause That’s Best for You
As mentioned earlier, there is no standard Pugh Clause that will address every situation adequately. Your specific situation should be considered by a professional.
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