I recently wrote about two appellate opinions dealing with retained acreage clauses in oil and gas leases. A retained acreage clause requires the lessee to release acreage not assigned to a producing well at the end of the primary term, or at the end of a continuous drilling program conducted after the primary term. One commentator has said that the purpose of a retained acreage clause is to “replace the lessor’s need to utilize the implied covenant of reasonable development as the sole means to see that its acreage is fully developed.” Bruce M. Kramer, Oil and Gas Leases and Pooling: a Look Back and a Peek Ahead, 45 Tex. Tech L. Rev. 877, 881 (2013).
A retained acreage clause should be included in any oil and gas lease that covers a significant amount of acreage – more than 100-200 acres. Below is a retained acreage clause, from the TLMA lease form. TLMA is the Texas Land and Mineral Owners Association. I prepared the lease form, and TLMA provides it to all of its members:
Upon expiration of the Primary Term, or upon cessation of “Continuous Drilling Operations” (as hereinafter defined), whichever is later, this Lease shall terminate as to all the lands and depths then covered thereby except lands and depths then designated by Lessee, in accordance with the requirements of this Paragraph, to be within a “Production Unit” (as hereinafter defined) assigned to each well then producing in paying quantities on the Leased Premises or lands properly pooled therewith.
- Continuous Drilling Operations. Lessee shall be considered to be engaged in “Continuous Drilling Operations” at the end of the Primary Term for purposes of this Paragraph if Lessee is engaged in Drilling Operations on the Leased Premises or lands pooled therewith at the end of the Primary Term, or if Lessee has completed or abandoned a well within ninety (90) days prior to the end of the Primary Term; and Lessee shall be deemed to be engaged in Continuous Drilling Operations for as long thereafter as Lessee conducts Drilling Operations on the Leased Premises or lands pooled therewith with due diligence and with intervals of not more than ninety (90) days between the date of completion or abandonment of one well and the date of commencement of actual drilling of the next well. If Lessee is engaged in Continuous Drilling Operations at the end of the Primary Term, then such Continuous Drilling Operations will be deemed to have ceased when Lessee fails to commence actual drilling of a well within ninety (90) days after the completion or abandonment of the preceding well, and this Lease shall thereupon terminate except as to Production Units assigned to wells then producing in paying quantities from the Leased Premises or lands pooled therewith, as provided in this Paragraph.
- Production Unit. A “Production Unit,” for purposes of this Lease, is a designated area of land around a well having the minimum amount of acreage necessary to obtain a regular permit for the drilling of a well, as required by the field rules of the Railroad Commission of Texas applicable to the field from which such well is producing. Each Production Unit shall be limited in depth to one hundred (100) feet below the deepest perforation in any well on such Production Unit.
- Maximum Sizes of Production Units. Notwithstanding any density rules applicable to any well, however, no Production Unit assigned to any well shall exceed the following sizes:
- If the well is classified as a vertical oil well under the Rules and Regulations of the Railroad Commission then in effect, the maximum size of the Production Unit shall be __________ acres [if the well is producing in whole or in part from formations less than __________________ feet beneath the surface, and ___________ acres if the well is producing from formations located wholly below ___________ feet beneath the surface].
- If the well is classified as a vertical gas well under the Rules and Regulations of the Railroad Commission of Texas then in effect, the maximum size of the Production Unit shall be __________ acres [if the well is producing in whole or in part from formations less than __________________ feet beneath the surface, and ___________ acres if the well is producing from formations located wholly below ___________ feet beneath the surface].
- If the well is classified as a horizontal well (whether oil or gas) under the Rules and Regulations of the Railroad Commission then in effect, then the maximum size of the Production Unit shall be determined by the following formula: A = 40 + .____ X L, where A = the area (in acres) of the Production Unit and L = the length (in feet) of the horizontal lateral component of the drainhole of the well, from the first take point to the last take point.
If at the time Lessee must designate Production Units in accordance with this Paragraph there is a well or wells on the Leased Premises producing from a field for which no field rules have yet been adopted, then Lessee shall designate a Production Unit complying with the size requirements listed in (i), (ii), or (iii) above, as applicable, and Lessee shall, if and when requested by Lessor, proceed with diligence to apply for field rules for such field; and when such field rules are adopted by the Commission, if such field rules provide for proration units smaller than the maximum Production Unit sizes provided for above, Lessee shall designate a Production Unit for such well complying with such field rules, and shall release the lands no longer included in the Production Unit for such well or wells; provided, however, that Lessee may maintain this Lease as to such excluded lands if Lessee commences Drilling Operations on such lands within sixty (60) days from the final adoption of such field rules, and continues such Drilling Operations with no cessation of more than sixty (60) consecutive days until production is established, in which event Lessee shall designate Production Units and this Lease shall remain in force as to the units so designated as provided in this Paragraph.
- Configuration of Production Units. Insofar as possible, taking into consideration the productive limits of the producing interval and the configuration of the Leased Premises, the lands included within the Production Unit for a well shall be in the form of a square or rectangle. Every effort shall be made in designating Production Units to avoid releasing small or irregularly shaped portions of the Leased Premises, or portions not contiguous with other released portions. Acreage assigned to wells producing from different zones may overlap, and shall overlap when necessary to comply with the requirements of this Paragraph. If a well is producing from more than one formation, its Production Unit’s size and configuration shall conform to the Railroad Commission rules applicable to the well which provide the largest Production Unit (subject to the size limitations stated above). If all or a portion of the Leased Premises is included in a pooled unit, then for purposes of this Paragraph all the lands within the pooled unit shall be considered a part of the Leased Premises, and the size and configuration of the pooled unit must conform to the requirements of this Paragraph for a Production Unit.
- Maintenance of Lease after Designation of Production Units. As to acreage and depths which are included within a Production Unit, this Lease may be held in force after the termination of the Primary Term or cessation of Continuous Drilling Operations, whichever is later, only by Operations conducted (as provided in this Lease) on such Production Unit (or lands pooled therewith), with no cessation of operations of more than sixty (60) consecutive days; and Operations conducted on one Production Unit (or lands pooled therewith) will not maintain this Lease in force as to any other acreage included within any other Production Unit, but such production or Operations will maintain this Lease only as to the acreage within the Production Unit or Production Units upon which such Operations are being conducted.
- Recordable Release. Upon termination of this Lease as to any portion of the Leased Premises, Lessee shall deliver to Lessor a plat showing the designated Production Units around each well (and designating the depth) and a partial release designating such Production Units in compliance with the requirements of this Paragraph, suitable for recording. Such release shall include a release of the depths below 100 feet below the deepest perforation of the well with paying production in each Production Unit, respectively.
The term “production unit” is used to distinguish it from pooled units and proration units. The three are quite different.
The time between completion and commencement of wells for “continuous drilling operations” is negotiable. Definitions for commencement of Drilling Operations and Completion of a well should be provided.
The definition of a Production Unit includes a depth limitation. How that depth limitation is defined may be the subject of negotiation. For example, the lease could require release of depths above and below the producing formation in each Production Unit.
The maximum size of Production Units is negotiated and may be different for oil and gas wells, different depending on depth of completion, and different for horizontal wells. Note that the size of Production Units for horizontal wells is the same for wells classified as oil or gas wells.
The maximum size of a Production Unit for a horizontal well is based on a formula: 40 + ____ X L, where L is the length of the lateral, from first take point to last take point. A take point is a perforation in the casing from which oil and gas is being produced. If the parties agree that the Lessee may have a 160-acre production unit for a well with a lateral length of 5,000 feet, then the formula is 40 + .024 X L. To derive the number that goes in the blank based on the desired size of the Production Unit, use the formula (A – 40)/L, where A = the desired size of the production unit for a well with a lateral length of L. For example, if the parties agree that a well with a 5,000-foot lateral will have a maximum Production Unit size of 320 acres, then the fraction to use in the formula is (320-40)/5000 = .056. Using this formula, if the well has, say, a 7,000-foot lateral, then the Production Unit for the well can be up to 40 + .056 X 7,000 = 432 acres.
After continuous drilling operations have ceased, each Production Unit in effect becomes a separate lease. Production from one Production Unit will not keep the lease in force as to any other Production Unit.
There are many other variations on retained acreage clauses; the above clause is only one example and does not address every issue that might be negotiated in such clauses. A retained acreage clause should, however, address each of the elements that is the subject of each of the paragraphs of the clause copied above.