A Held-by-Production Clause?
A “hold-by-production” clause in an oil or natural gas lease permits the lessee, often an energy corporation, to continue drilling as long as the property economically produces a minimum amount of oil or gas. The held-by-production provision allows the lessee to use the property after the initial lease period. Mineral leases include this clause as well.
Held-by-Production Clause Function
The held-by-production clause lets energy corporations operate under a secondary term throughout the whole economic life cycle of an oil or gas field without renegotiating leases. They save a lot, especially in “hot” locations with abundant oil and gas production. To renegotiate leases, leaseholders naturally want higher prices due to rising property values.
Habendum rule
Holland & Hart, a legal firm, refers to the held-by-production condition in a lease as the habendum clause. A habendum provision in an oil and gas lease usually has primary and secondary terms. The primary term expires in the future. The secondary-term duration is indeterminate. Oil and gas production maintains the lease.
Leasing Mineral Rights
A mineral rights lease for the oil business that operates production facilities on another owner’s land gives them the right to access the minerals or reserves on that land beyond the lease period.
After the U.S. and Canadian shale oil boom, this problem is crucial. These shale deposits may make land valuable. Holding-by-production rules exclude certain landowners from the lease windfall, making the shale boom less desirable.
With held-by-production provisions, oil corporations can maintain leasehold control if at least one well produces a “minimum paying quantity” of oil or gas. Minimum-paying quantities are usually oil production values that surpass operational expenses. This can cause friction between landowners and oil and gas firms.
Held-by-Production Clause Examples
The Energy Mineral and Law Foundation reported that held-by-production provisions surged considerably when Range Resources, an independent natural gas operator, began developing profitable horizontal hydraulic fracturing wells in Washington County, Pennsylvania, in 2007.
After Range’s success with the new strategy, other corporations began leasing property for construction at rising prices. “Competition for acreage caused lease prices to escalate from historical prices of $1 per acre to $500 per acre, then to $1,000 per acre, and then to as much as $10,000 and more.”
To safeguard their investments against price increases, corporations sought hold-by-production provisions in their new leases. They sometimes bought existing leases for poorly performing wells to enhance profits with new fracking technology.
Conclusion
- If their mines are productive, held-by-production provisions let oil, gas, and mineral miners renew their land leases.
- Held-by-production clauses are “habendum” clauses.
- Mining corporations want held-by-production provisions to lock in lease prices in “hot” producing zones.
