As landowners have become more sophisticated in their negotiations of oil and gas leases, they have begun to insist on the inclusion of a “continuous operations” or “continuous drilling” clause in their leases. The idea behind such clause is that the lessee should have a reasonable time to fully develop the leased premises, after which the lessee should release that portion of the leased premises not necessary for the production of the wells it has drilled.
There is no “standard form” of continuous operations clause. Generally, a continous operations provision should address the following:
- At a specified time (the “partial termination date”), the lessee should be required to designate a specified tract (a “production unit”) around each well then producing on the leased premises, and release all acreage not included within a production unit. The maximum size of the production unit should be specified. In addition, the lessee should be required to release depths under each production unit below the depth from which the well on that unit is producing.
- The clause should provide that, after the designation of production units, production from each production unit will maintain the lease in effect only as to the lands included within that production unit. In effect, each production unit becomes a separate lease for lease maintenance purposes.
- The “partial termination date” should be the end of the primary term unless the lessee is drilling a well at the end of the primary term. If a well is then being drilled, then the partial termination date is delayed for as long as the lessee continues to drill wells on the lease. The lease should specify what activities constitute continuous drilling operations after the end of the primary term. Generally, this is defined as the drilling of successive wells, with no more than a specified number of days between the completion of one well and the commencement of drilling of the next well. The terms “completion” and “commencement” should be defined.
Many details of a continuous operations clause are subject to negotiation, including the size of production units, the depth held by production from each well, the time between wells and how it is calculated, whether the lessee can “bank” time between wells by accelerated drilling, and the configuration of production units.