Helpful Oil & Gas Definitions P-Z

Paid-Up Lease. An oil and gas lease that does not provide for delay-rental payment. The lease is effective for the whole period of the primary term.

1. Partition. The division of undivided interests in kind or by sale, by voluntary agreement or judicial action.

Percentage Depletion. A provision of § 611 of the Internal Revenue Code that permits a taxpayer who owns an economic interest in a producing oil or gas well to deduct a specified percentage of the gross income from the well in lieu of depleting the actual basis. See also Cost Depletion.

Petroleum Conservation Law. A state law that limits the rule of -capture and defines the correlative- rights doctrine by regulating the drilling and operation of oil and gas wells. Petroleum conservation laws are intended to prevent waste and protect correlative rights.

1. Pooling. Bringing together, either by voluntary agreement (voluntary pooling) or by order of an administrative agency (compulsory or forced pooling), small tracts or fractional interests to drill aPooling is usually undertaken to comply with well spacing requirements established by state law or regulation. Pooling is usually associated with drilling a single well and operating that well by primary-production techniques. In the oil and gas industry, the term is sometimes used interchangeably with unitization.

Pooling Clause. A clause found in most leases that grants the lessee the power to combine part or all of the leased acreage with other properties for exploration, development, or operation.

1. Prescription. A Louisiana doctrine that extinguishes unused mineral servitudes after 10To interrupt the running of the prescription period, there must be operations to discover or produce on the land or land pooled with it.

Price-Renegotiation Clause. A clause in a gas contract providing for price renegotiation from time to time or upon election of one of the parties.

Primary Recovery. Oil or gas production that occurs because of the pressure differential between the formation where the oil or gas is located and the borehole, though the primary recovery includes oil produced using pumping units or other artificial-lift mechanisms. See also Secondary Recovery and Tertiary Recovery.

Primary Term. The option period-set by the oil and gas lease habendum clause-during which the lessee retains the right to search, develop and produce from the premises without having any obligation to do so. The primary term should be sufficiently long to permit the lessee to evaluate the property and make arrangements to drill it. In practice, the primary term may extend for 24 hours or 25 years, depending upon how much competition there is for leases in the area. See also Habendum Clause and Secondary Term.

Production Payment. A share of production value or proceeds from property, free of the costs of production, that terminates when an agreed sum has been paid; e.g., “1/5 of all oil and gas produced and saved from said land until the market value at the well of such production shall aggregate One Million Dollars . .. . “

Profit a Prendre. At common law, the right to enter the land of another and take away some fruit of the soil. In many states mineral rights or oil and gas leases are classified as profits a prendre.

Proportionate-Reduction Clause. Another name for the Lesser-Interest Clause.

Protection Covenant. The promise implied in an oil and gas lease that the lessee will protect the premises against drainage by drilling a producing well to the reservoir that is subject to drainage, if a reasonably prudent operator would do so. See also Reasonably Prudent Operator Standard.

Pugh Clause. A lease clause (called a Freestone Rider in Texas) modifying the effect of most lease pooling clauses by severing pooled portions of the lease from unpooled portions of the lease so that drilling or production on a pooled portion will not maintain the lease as to unpooled portions.

Pumping Unit. Equipment used to pump oil to the surface when the pressure differential between the pressure in the formation and in the borehole is insufficient to cause oil to rise up the borehole to the surface. Sometimes called a pump jack or horsehead.

1. Pumpjack. Another term for a pumping

Reasonable-Development Covenant. The promise implied in oil and gas leases that, once a lessee obtains production, the lessee will continue to develop the premises as would a reasonably prudent operator rather than merely holding the lease by the production already obtained. See also Further Exploration Covenant.

Reasonably Prudent Operator Standard. The test generally applied to determine a lessee’s compliance with implied lease covenants. Also called the “reasonable prudent operator” standard and the “prudent operator” standard. The term refers to what a reasonable, competent operator in the oil and gas industry, acting in good faith and with economic motivation, and taking into account the lessor’s interests as well as its own, would do under the circumstances. Also called the reasonable prudent operator standard and the prudent operator standard.

Regulatory-Out Clause. Another name for a FERC-Out Clause.

Rental Division Order. A stipulation signed by those entitled to delay rentals stipulating their interests and how much rental each is to receive.

Royalty Interest. A share of production, or the value or proceeds of production, free of the costs of production, when and if there is production. Royalty is usually expressed as a fraction; e.g., 1/6. A royalty- interest owner has no right to operate the property, and therefore no right to lease or to share in bonus or delay rentals. In some states a royalty owner has the right of access and egress to take the royalty production. There are several different, but related, kinds of royalty interests. See e.g., Landowner’s Royalty, Non-Participating Royalty, and Overriding Royalty.

Rule of Capture. The fundamental principle of oil and gas law that there is no liability for capturing oil and gas that drains from another’s lands. The owner of mineral rights in a tract of land acquires title to the oil and gas produced from wells drilled on the land, though part of the oil and gas may have migrated from adjoining lands.

Secondary Recovery. The second stage of oil or gas production, typically involving injection of water or gas or both to maintain the pressure differential between the formation where the oil or gas is located and the borehole. See also Primary Recovery and Tertiary Recovery.

Secondary Term. The term of the oil and gas lease after production has been established, typically “as long thereafter as oil and gas is produced from the premises.” See also Habendum Clause and Primary Term.

1. Separator. Equipment used at the well site to separate oil, water, and gas produced in solution withBasic separators simply heat oil to speed the natural separation process. More complex separators may use chemicals. Severance A transfer or reservation of a part of the “bundle of rights” that make up property ownership. Mineral rights are frequently “severed” from surface rights in property that may contain oil and gas or other minerals.

Shut-in Royalty Clause. A lease provision permitting the lessee to maintain the lease while there is no production from the premises because wells capable of production are not producing. The lessee pays the lessor a “shut-in royalty” in lieu of production.

Subrogation Clause. A lease provision permitting the lessee to pay taxes, mortgages, or other encumbrances on the leased property and to recover those payments out of future proceeds from the lease.

Support Agreements. Contracts between people or entities in the oil and gas industry that encourage and “support” exploratory operations. Generally, one party agrees to contribute money or property to another if the other will drill a well on leases that it holds and provide the contributing party with information from tests conducted. For the contributing party, a support agreement is a purchase of geological or technological information. For the party receiving the support, the contribution lessens the cost or the risk of drilling operations. For further discussion, see Dry-Hole Agreement, Bottom-Hole Agreement, and Acreage-Contribution Agreement.

Surface Interest. All rights to property other than the mineral interest. The surface interest has the right to the surface subject to the right of the mineral-interest owner to use the surface. The surface interest is entitled to all substances found in or under the soil that are not defined as minerals.

Surrender Clause. A clause commonly found in an oil and gas lease authorizing a lessee to release its rights to all or any portion of the leased premises at any time and be relieved of further obligations relating to the acreage surrendered.

Temporary-Cessation-of-Production Doctrine. The rule that an oil and gas lease term “for so long thereafter as oil and gas are produced” will not terminate once the lease owner attains production unless the cessation of production is for an “unreasonable” length of time, taking into account all of the facts and circumstances. See also Cessation-of-Production Clause.

Term Clause. Another name for the Habendum Clause.

Term Interest. A mineral interest or royalty interest that is not perpetual. A term interest may be for a fixed term (e.g., for 25 years) or a defeasible term (e.g., for 25 years and so long thereafter as there is production from the premises).

Tertiary Recovery. The third stage of oil or gas production, involving injection of chemicals, hydrocarbons, carbon dioxide, or steam to maintain formation pressure and to improve the flow of oil and gas through the formation to the borehole. Sometimes called enhanced recovery. See also Primary Recovery and Secondary Recovery.

Top Lease. A lease granted on property already subject to an oil and gas lease. Generally, a top lease grants rights if and when the existing lease expires.

Turnkey Drilling Contract. A drilling contract under which the drilling contractor agrees to perform stated functions for an agreed price. The lease operator has little or no discretion to instruct the drilling contractor and little or no liability exposure for the contractor’s actions.

1. Unitization. Bringing together some or all of the well spacing units over a producing reservoir for joint operations, either by agreement of the owners (voluntary unitization) or by order of an administrative agency (compulsory or “forced” unitization). Unitization is usually undertaken after primary production has begun to falloff substantially to permit efficient secondary or tertiary-recoveryInthe oil and gas industry, the term is sometimes used interchangeably with

Unitization Clause. A lease provision granting the lessee the right to unitize the leased premises, generally for secondary or tertiary-recovery operations. It is somewhat unusual to see “true” unitization clauses; generally the pooling clause addresses the right to unitize tangentially and subject to acreage limitations that make unitized operations difficult.

“Unless” Lease. An oil and gas lease with a drilling- delay rental clause structured as a special limitation to the primary term. The lease automatically terminates, though the lessee has no liability for its failure to perform, “unless” delay rentals are paid or drilling operations are commenced.

Warranty Clause. A deed or lease clause by which the grantor guarantees that title is without defect and agrees to defend it. If the warranty is breached, the grantor may be liable to the grantee to the extent that the grantor has received payments. Presence of a warranty clause in a mineral deed or oil and gas lease may also cause after-acquired interests to pass from the grantor to the grantee by application of estoppels by deed.

Well-Completion Clause. See Operations Clause.

Working Interest. The rights to the mineral interest granted by an oil and gas lease, so called because the lessee acquires the right to work on the leased property to search, develop, and produce oil and gas, as well as the obligation to pay all costs. Sometimes used to describe the mineral interest itself