Pugh Clauses in Oil and Gas Leases: Horizontal and Vertical Explained

Imagine a rancher in Reeves County who signs a lease in 2018 covering a full section — surface to basement rock, every depth, every acre. The operator drills one Wolfcamp well on the northeast 40, brings it online, and then announces no further development for the remaining seven productive benches stacked above and below it. The rancher is locked in. The lease is held by production from a single horizontal in a single zone, and unless the lease has the right protective language, the operator can sit on the other six benches and 600 acres indefinitely. The protection that should have been negotiated up front is called a Pugh clause.

Under a standard oil and gas lease, production anywhere on the leased tract holds the entire lease — every acre, every depth. This is called held-by-production (HBP). Without modification, a single vertical well on 40 acres can hold 640 acres and all formations from surface to basement rock for the life of the well.

This is a terrible outcome for a mineral owner with a large tract or a tract that spans multiple prospective formations. If the operator develops only one zone, the other zones are locked up indefinitely with no further bonus, no further drilling, and no way for a more aggressive operator to lease the undeveloped acreage or depths.

The Pugh clause is a lease modification — named after Lawrence Pugh, the Louisiana attorney who popularized it in the 1940s — that carves out undeveloped acreage or depths once the primary term ends. After the carve-out, the lease continues only on the portions the operator is actually developing, and the rest of the mineral owner's interest is released.

A horizontal Pugh clause limits the lease after the primary term to the portion of the leased tract that is included in a producing unit or otherwise being developed. Acreage outside of any producing unit or drilling unit is released.

The mechanics typically work like this: at the end of the primary term, any portion of the leased premises not included in a producing, pooled, or shut-in unit is automatically released. The released acreage reverts to the mineral owner free of the lease and can be leased to another operator or retained.

Horizontal Pugh clauses are most valuable on large tracts where the lease covers hundreds or thousands of acres and the operator may only develop part of the acreage. They also matter for tracts partially pooled into units, because without a Pugh clause the unpooled portion is still held by the pooled production.

Some leases include a partial horizontal Pugh that only releases acreage beyond a certain distance from producing wells, or that releases after a fixed number of years. The exact language controls, so careful drafting is important.

A vertical Pugh clause limits the lease after the primary term to the depths that the operator is actually producing or has drilled through. Depths below the deepest production (and sometimes depths above the shallowest production) are released.

The classic formulation releases all depths below the stratigraphic equivalent of 100 feet below the deepest depth actually produced or encountered. If the operator completes a well in the Wolfcamp formation, the lease continues in the Wolfcamp and shallower formations but releases the deeper Woodford, Ellenburger, and basement — which can be separately leased to another operator for deeper development.

Vertical Pugh clauses are especially valuable in stacked-pay basins like the Permian, where a single tract may contain multiple productive formations at different depths. Without a vertical Pugh, the first operator to drill any zone locks up all zones indefinitely, even if they have no intention of developing the deeper or shallower intervals.

If you are negotiating a new lease on valuable acreage, both types of Pugh clauses are worth insisting on. The specifics to negotiate include:

Timing: When does the carve-out take effect? Most Pugh clauses trigger at the end of the primary term. Some delay the trigger (e.g., 12 months after primary term ends) to give the operator time to finalize development plans.

Unit definition: A horizontal Pugh clause should clearly define what "unit" means — a pooled unit, a producing unit, a drilling unit under state law, or something else. Vague language creates disputes.

Depth severance: A vertical Pugh clause should clearly specify where the cut-off is. "100 feet below the deepest depth drilled" is common and workable. "Deepest formation in which the lessee is producing" is narrower and better for the owner.

Partial release documentation: The clause should require the operator to file a release of record identifying the released acreage or depths. Without this, title is clouded and a third-party operator will not lease the released portion.

Many legacy Texas, Oklahoma, and New Mexico leases were signed without Pugh clauses. The operator may now hold hundreds or thousands of acres based on a single marginal well, with no incentive to develop further.

If you are in this situation, your options depend on the lease terms and the current production. Options include: demanding that the operator either develop or release (some leases have implied covenants of reasonable development that can be enforced by litigation, though the standards are high); waiting for the lease to terminate for lack of paying-quantities production; or selling the burdened interest to a buyer willing to take on the leased status.

Pointer Minerals purchases leased mineral interests regularly, including interests burdened by leases without Pugh clauses. We price based on the realistic outlook for the lease — whether it is likely to be developed, held for decades, or terminate — and structure offers accordingly. If you have acreage you believe is being unfairly held, we can discuss whether a sale now is preferable to a prolonged dispute with the operator.