What is a Held-By-Production Clause?
Let me explain what a held-by-production clause really is. It's a provision in an oil or natural gas property lease that lets the lessee, usually an energy company, keep drilling on the property as long as it's economically producing at least a minimum amount of oil or gas. This clause extends your right to operate beyond the initial lease term, and you'll see it in mineral property leases too.
Key Takeaways
- Held-by-production clauses allow miners for oil, gas, and minerals to extend their land leases after they expire as long as the mines are still productive.
- Held-by-production clauses are also called “habendum” clauses.
- Mining companies seek held-by-production clauses to lock in a lease price in potentially “hot” areas of production.
How a Held-By-Production Clause Works
You need to understand how this clause operates in practice. The held-by-production provision lets energy companies avoid renegotiating leases when the initial primary term expires, allowing them to continue under a secondary term for the full economic life of an oil or gas field. This saves them a lot, especially in areas that have become 'hot' due to high output from wells. Property prices in these spots are usually rising, so landowners would demand much higher rates for new leases.
Habendum Clause
According to the law firm Holland & Hart, the held-by-production clause in a lease can also be called the habendum clause. In an oil and gas lease, a habendum clause typically has two terms: the primary term, which is fixed and ends at a set point, and the secondary term, which is indefinite. As long as oil and gas are produced, the lease stays in effect.
Mineral Rights Lease
Held by production is a type of mineral rights lease for the oil company, where the company operating on another owner's land has the right to access the minerals or reserves beyond the original lease term. This becomes crucial with the shale oil boom in the U.S. and Canada, where land with shale resources holds high value. For some landowners, though, the boom isn't good news because held-by-production clauses cut them out of new leasing profits.
Under these clauses, oil companies can keep control of the entire leasehold if there's at least one well producing a 'minimum paying quantity' of oil or gas. Minimum paying quantities are defined as production value exceeding operating costs. This setup often leads to conflicts between landowners and the operating companies.
Examples of a Held-By-Production Clause
Consider this example from the Energy Mineral and Law Foundation: the use of held-by-production clauses surged after Range Resources started drilling highly profitable horizontal, hydraulic fracturing wells in 2007 in Washington County, Pennsylvania.
Once the industry learned of Range’s successes, other companies rushed to lease property, driving prices from historical $1 per acre up to $500, then $1,000, and even $10,000 or more per acre.
To shield their investments from these price hikes, companies pushed for held-by-production clauses in new leases, and sometimes they bought old leases with underperforming wells to apply new fracking tech and boost profits.
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