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CONTINUING THE LEASE: SUBSTITUTES FOR PRODUCTION AND THE MEANING OF CONTINUOUS OPERATIONS

Allen D. Cummings, Drafting and Negotiating the Modern Oil and Gas Lease

An oil and gas lease will most often terminate, according to its habendum clause, unless oil or gas is being produced on or before the expiration of the primary term to perpetuate the lease into its secondary term and oil or gas is continuously produced during the secondary term. There are of course habendum clauses favored by lessees in which the lease is perpetuated beyond the primary term by “operations as defined herein ” However, there are often circumstances where, notwithstanding the good faith efforts of the lessee, oil or gas is not being produced at or before the end of the primary term or oil or gas is not continuously produced during the secondary term. For example: (1) lessee completes a well as capable of producing oil and substantial casinghead gas or only gas, the day before expiration of the primary term, but there are not any pipeline connections in the vicinity of the well to take the gas; (2) the drilling rig suffers a casualty during the drilling of a well at or near the expiration of the primary term and ten days are required before normal drilling operations can be resumed; (3) a horizontal shale well is drilled to the terminus, but no fracing services are immediately available; (4) a well producing oil or gas during the secondary term suddenly stops producing due to a downhole failure; (5) a well is completed as a dry hole 30 days prior to the expiration of the primary term and it will take several weeks to obtain another drilling rig and build location; or (6) fracing operations on a well are in progress, but have to be temporarily abandoned because of Category 4 Hurricane Harvey;