Preventing Partial Unitization from Holding Your Entire Property Without Additional Compensation
When a natural gas company presents a lease offering:
- A five-year primary term, and
- A five-year company option to extend,
many landowners focus primarily on bonus dollars and royalty percentages.
However, one of the most financially significant protections in that lease is the Pugh clause.
Without a properly negotiated Pugh clause, a company can unitize a very small portion of your property — sometimes even one acre or less — and use that limited unitization to hold your entire tract for years without paying any additional bonus or negotiating new lease terms.
As a Pennsylvania oil and gas attorney representing landowners only, I routinely negotiate strict Pugh clauses to prevent this exact scenario.
What Is a Pugh Clause?
A Pugh clause limits the company’s ability to hold all of your acreage merely because a small portion is included in a producing unit.
Without a Pugh clause:
- If you own 100 acres,
- And the company unitizes 1 acre into a producing unit,
- Production from that unit can hold the entire 100 acres,
- Even if the remaining 99 acres are never developed.
This is called holding the lease “by production.”
For landowners, that means lost leverage, lost bonus opportunities, and long-term acreage control by the operator.
The Five-Year Lease + Five-Year Option Problem
In many Pennsylvania leases, the structure is:
- 5-year primary term
- 5-year unilateral option to extend by the company
That extension typically requires an additional bonus payment — unless the lease is already being held by production or unitization.
Without a strict Pugh clause, the company may:
- Unitize a minimal portion of your property late in the primary term.
- Establish production from that unit.
- Hold the entire property.
- Avoid paying the five-year extension bonus.
In effect, strategic unitization can eliminate your right to renegotiate at the end of Year 5.
How a Strict Pugh Clause Protects Landowners
A properly drafted Pugh clause should provide that:
- Only acreage actually included in a producing unit remains leased.
- All non-unitized acreage is automatically released at the end of the primary term.
Example:
If you own 100 acres and only 15 acres are unitized:
- The 15 acres remain leased.
- The remaining 85 acres are released.
- You are free to re-lease that acreage at current market value.
This restores bargaining power to the landowner.
The Risk of Modified Pugh Clauses
Not all Pugh clauses are equal.
Companies often propose modified language such as:
“If any portion of the leased premises is unitized during the primary term, Lessee shall have an additional three (3) or five (5) years to unitize the remainder.”
This type of provision:
- Allows token unitization during Year 5,
- Grants a multi-year window to unitize the rest,
- Enables the company to avoid paying the extension bonus,
- Effectively extends the lease without new compensation.
These clauses significantly dilute the protection a true Pugh clause is intended to provide.
In many negotiations, I either remove these provisions entirely or strictly limit their scope.
Depth Severance: The Powerful Companion to a Pugh Clause
A sophisticated lease negotiation does not stop at acreage release.
I frequently negotiate a depth severance provision alongside a Pugh clause.
Depth severance requires that at the end of the primary term:
- The company must release all formations below the deepest drilled depth.
Example 1: Marcellus Only
If the company drills to the Marcellus formation:
- At the end of Year 5,
- All formations below Marcellus must be released.
Example 2: Utica Drilled
If the company drills to the Utica formation:
- The lease is limited to the depth of the Utica and shallower formations.
- Deeper formations must be released.
Because the Marcellus lies above the Utica, drilling to Utica typically allows continued access to Marcellus as well — but not to deeper formations.
Without depth severance, a company may:
- Drill one well,
- Hold all geological horizons indefinitely,
- Prevent future leasing opportunities,
- Without additional compensation.
Why This Matters in Pennsylvania’s Marcellus and Utica Regions
Pennsylvania’s shale development involves multiple productive horizons, including:
- The Marcellus Shale
- The Utica Shale
- Potential deeper formations
These formations may have independent economic value.
Without both a strict Pugh clause and depth severance, a landowner may unintentionally surrender control of:
- Undeveloped acreage
- Undeveloped depths
- Future leasing opportunities
for many years.
Key Questions Pennsylvania Landowners Should Ask
When reviewing a five-year lease with a five-year extension option:
- Is there a strict Pugh clause?
- Does it automatically release non-unitized acreage?
- Does it contain delayed unitization windows?
- Can the company avoid paying the extension bonus?
- Is there a depth severance provision?
- Are undeveloped formations protected?
These provisions often determine whether a landowner preserves long-term value — or allows strategic lease extension without additional compensation.
Protecting Landowners Through Careful Drafting
Oil and gas companies draft leases to preserve maximum flexibility.
Landowners must negotiate for:
- Strict Pugh clause protection
- Removal of modified unitization loopholes
- Depth severance provisions
- Preservation of renegotiation leverage
If you are negotiating a Pennsylvania oil and gas lease and want to ensure your property cannot be partially unitized and indefinitely held without additional compensation, experienced landowner-focused representation is critical.
Douglas A. Clark, Esq.
Pennsylvania Oil & Gas Lease Attorney
Representing Landowners Only
PAGasLeaseAttorney.com
