THE PUGH CLAUSE
The Pugh Clause is the language used in an oil & gas lease to spell out what happens to the portion of the acreage you leased that does not either contain a well or is not included within a producing petroleum pool or unit. The typical Pugh Clause reads as follows:"If at the end of the primary term, a part but not all of the land covered by this lease, on a surface acreage basis, is not included within a unit or units in accordance with the other provisions hereof, this lease shall terminate as to such part, or parts, of the land lying outside such unit or units, unless this lease is perpetuated as to such land outside such unit or units by operations conducted thereon or by the production of oil, gas or other minerals, or by such operations and such production in accordance with the provisions hereof."
While the clause may seem complicated at first, its meaning is quite simple: at the end of the primary term, the lease will expire as to any part of the land that is not being used by the petroleum company. Without the Pugh Clause, if your lease covered 600 acres and the petroleum company only put 20 acres in a pooled unit for a producing well, the lease would remain in effect as to the 580 acres not being used as well as the 20 acres in the unit. Even though you are receiving no production (and thus no profit) from the 580 acres, they would remain tied-up by the lease indefinitely. With the Pugh Clause, the 580 acres would be released from the lease at the end of the primary term. You would continue to receive royalties from the production from the 20 acres, and the 580 acres would be available to lease to another company when one comes along.
Depending on the additional language in the lease, you must keep in mind that the petroleum company may be able to hold on to the 580 acres in our example through methods other than actual production of oil or gas. Some of the typical ways that land can be maintained absent production is through seismic work, continued drilling operations, or additional rental payments. As with all provisions of the lease, the Pugh Clause and any additional language must be worded very carefully to provide maximum opportunity for the petroleum company while also providing maximum protection for the landowner.