Because the Marcellus Shale geologic formation is located above the Onondaga layer, Pennsylvania Oil and Gas Law does not prescribe a maximum or minimum size for a unit of natural gas production.
Pennsylvania law gives gas companies substantial power and discretion in creating production unit sizes and boundaries. The cynical may argue that gas companies may use this broad authority to “gerrymander” unit boundaries to hold entire parcels under gas lease terms even though only a small portion of the parcel’s acreage is included in a unit.
Landowners who are property included in a production unit receive a pro‐rated share of the royalty based on the acreage they have within the unit. Accordingly, if lease compensation terms are identical, a Landowner with 10 acres in a production unit will receive twice the royalties of a Landowner who owns 100 acres, but only has 5 acres in the unit. This example illustrates the importance of a “Pugh Provision,” especially for larger acre Landowners.
A Horizontal Pugh Provision in its purest form requires the gas company to include all the Landowner’s property in a production unit by the expiration of the primary term of the gas lease. If the gas company does not unitize the entire parcel, the remaining non‐unitized acreage reverts back to the Landowner at the end of the primary term. The Landowner may then enter into a new gas lease for the reverted acreage for additional bonus consideration and potentially improved leasing terms. Of course, the Landowner is also free to simply not enter into a new gas lease for the non‐unitized acreage and hold this acreage without an active gas lease.
A Vertical Pugh Provision is similar to a depth severance provision and is not as well‐known and understood as the Horizontal Pugh Provision. A Vertical Pugh Provision generally allows a gas lease to continue beyond the primary term for all depths from the surface down to the deepest producing formation. In other words, a favorable Vertical Pugh Provision will provide that all depths below the deepest producing formation, such as the Marcellus Shale layer, will revert back to the Landowner at the end of the primary term of the gas lease. A Vertical Pugh Provision is a valuable provision and generally more difficult to obtain than a Horizontal Pugh Provision. The typical benefit of a Vertical Pugh Provision is that it will release deeper shale formations, such as the Utica Shale formation, so that the
Landowner may negotiate a future Oil and Gas lease for depths below the formation currently drilled by the gas company. A Vertical Pugh Provision may prove to be a highly value provision as Gas companies have shown a stronger desire to explore for gas at depths below the Marcellus Shale formation.
Unfortunately, Pugh Provisions are often difficult, or even impossible, to obtain in today’s natural gas leasing market. However, a skilled negotiator may craft an acceptable “modified” Pugh Provision that will benefit the Landowner, although not have the optimal effect of a “pure” Pugh Provision. Attorney Doug Clark has drafted and secured modified Horizontal and Vertical Pugh Provisions to the benefit of Landowners when “pure” Pugh Provisions were unavailable. Almost all Landowners should seek pure or modified Pugh Provisions in their gas lease. Attorney Doug Clark is Pennsylvania’s Landowner Lawyers and drafts and negotiates Pugh Provisions for Landowners. We can help you, Contact us today!