Held-By-Production Clause

What is a Held-By-Production Clause?

"Held by production" is a provision in an oil or natural gas property lease that permits the lessee, generally an energy company, to keep drilling activities on the property for however long it is economically delivering a base amount of oil or gas. The held-by-production provision thereby stretches out the lessee's right to operate the property past the initial lease term. This provision is likewise a feature of mineral property leases.

How a Held-By-Production Clause Works

The held-by-production provision empowers energy companies to try not to revise endless supply of the initial (primary) term and permits them to operate under a secondary term for the whole economic life cycle of an oil or gas field. This outcomes in extensive savings to them, especially in geographical areas that have become "hot" due to productive output from oil and gas wells. With property prices in such areas generally on a vertical trend, leaseholders would naturally demand essentially higher prices to rework leases.

Habendum Clause

As per the law firm Holland and Hart, the held-by-production clause in a lease can likewise be called the habendum clause. A habendum clause in an oil and gas lease regularly contains two separate terms, the primary term and the secondary term. The primary term is a fixed time span and lapses eventually. The time span under the secondary term is endless. Insofar as oil and gas are created, the lease stays in effect.

Mineral Rights Lease

Held by production is a type of mineral rights lease for the oil company, where the oil company operating the production facilities on another proprietor's land has a privilege to access the minerals or reserves on that land past the initially agreed lease term.

This issue is especially important in the wake of the shale oil boom in the U.S. what's more, Canada. Land with these shale resources can command impressive value. For certain landowners, notwithstanding, the shale boom is less great news since they have been cut out of the leasing windfall by held-by-production clauses.

Under held-by-production clauses, oil companies can hold control of the whole leasehold for however long there is something like one well delivering a "base paying amount" of oil or gas on the property. (Least paying amounts are generally defined as a value of oil production that surpasses operating costs.) This can make impressive conflict among landowners and the oil and gas companies operating there.

Instances of a Held-By-Production Clause

As per the Energy Mineral and Law Foundation, the utilization of held-by-production clauses increased decisively after Range Resources, an independent natural gas company, started drilling very beneficial horizontal, hydraulic fracturing wells in 2007 in Washington County, Pennsylvania.

At the point when the industry became aware of Range's triumphs with the new technique, different companies started leasing property at development at soaring costs. The "opposition at land caused lease costs to heighten from historical prices of $1 per section of land to $500 per section of land, then to $1,000 per section of land, and afterward to as much as $10,000 and more per section of land."

To safeguard their investments from price rises, companies looked for held-by-production clauses in their new leases, and now and again they sought buy old leases for ineffectively performing wells and utilize the new fracking technology to increase profits.

Features

• held-by-production clauses are likewise called "habendum" clauses
• Held-by-production clauses permit diggers for oil, gas and minerals expand their land leases after they lapse as long as the mines are as yet useful.
• Mining companies look for held-by-production clauses to lock in a lease price in possibly "hot" areas of production.