DADOA Newsletter 3rd Qtr Volume VIII Issue III
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Transcript of DADOA Newsletter 3rd Qtr Volume VIII Issue III
goes home to his most important
job: being an involved and dedi-
cated father and husband. He and his wife, Margaret, have
three children. He has been very active in coaching soccer and
football and working with kids in
YMCA programs. Outside of his love for reading, Bryan’s hobbies
are mostly outdoor activities
such as hunting and skiing.
He will speak on reaching your full potential with your family and
your career using a stair step
method on how top producers and effective leaders keep on the
cutting edge and achieve excel-
lence.
He will show you how to:
Have your best year ever
Create consistent upward
growth in your life
Tap into the power of per-sonal energy & harness its
unlimited supply
Bryan Dodge holds the record as the busiest speaker in the US.
He has been a keynote and ses-sion speaker for both NADOA and
NALTA. He is a best–selling
author, an industry leading speaker, a renowned radio per-
sonality, an experienced busi-
ness consultant, and a highly
sought after executive coach.
At all of his events, he stresses
the importance of keeping pro-
fessional life and personal life in balance. Bryan practices what he
teaches when he says that he
Bryan touches audiences of all
ages through his gift of love and
encouragement while making learning fun and memorable.
You do not want to miss this free
event.
When: Thursday, October 15,
2015
Where: Denver Athletic Club
1325 Glenarm Place, Denver
Colorado 80204
What Time: 3 p.m. – 5 p.m.
Cost: Free of charge
Space is limited. Register early
to guarantee you have a seat.
Registration opens September 1,
2015 online at DADOA.org.
Attendees are encouraged to get
together and network at a venue
of your choice after the presen-
tation.
DADOA and DALTA are Proud to Sponsor a Motivating and
Inspiring Presentation By Bryan Dodge
Denver Association of
Division Order Analysts
DADOA Newsletter
Inside this issue:
The Pugh Clause: His-
torical Development
and Variations
1—4
Analyst Spotlight 5
NADOA Scholarship
Winner
6
NADOA 2015 Board
Members
6
NADOA Institute Photos 7—8
September 22, 2015 Volume VIII, Issue III
partial release of the oil and gas
lease as to all areas of the lease
not included in a producing unit after the primary term of the
lease has ended.
As mentioned here, it is the land
professional's responsibility to understand pugh clauses. This is
a responsibility that is not shift-ed to the title opinion lawyer.
Title opinions examine mineral
and leasehold ownership history - not production history - and
The Pugh Clause:
Historical Develop-
ment and Variations
Jul 9, 2014
By: Roger Gingell, Attorney & In-House
Landman
As most or all oil and gas land
professionals are aware, the pugh clause is a term in an oil
and gas lease that is negotiated
for by the mineral owner (the “lessor”), generally to allow for a
thus generally do not cover the
application of pugh clauses,
except to warn about their exist-
ence.
This writing is to shed light on
the development of the pugh
clause over time. The infor-mation contained is not exhaus-
tive, but rather is based largely on my own experience working
with in-house leasehold title on
producing properties.
continued
Page 2 Volume VIII, Issue III
The Pugh Clause:
Historical Development and Variations continued
Early Development
As mineral owners in the first half of the 20th century began to
discover that boilerplate oil and
gas leases enabled the oil and gas company (the "lessee") to
hold portions of leases not in-cluded in producing units, some
lessors with large undeveloped
acreage positions that were nonetheless held-by-production
sued for acreage releases under the implied duty of reasonable
development.
This undeveloped acreage repre-
sented lost income to mineral
owners who were prevented from obtaining additional bonus
payments and royalty payments on production when their miner-
als went undeveloped but were
still under lease and could not be
leased to a new party.
Avoiding time consuming and
costly litigation and a desire for
the ability to quickly lease unde-veloped acreage in a producing
lease whose primary term has
expired - free of a cloud on title - were certainly the main driving
factors which led to the develop-
ment of the pugh clause.
Generally, only large mineral owners in historically high pro-
duction areas had the practical or inherited experience to nego-
tiate for pugh clauses in the
early years of the clause's devel-
opment.
The Original Pugh Clause
Early pugh clauses typically
contained language stating that after the expiration of the prima-
ry term or any extensions
earned by operations under the
terms of the lease, the lease
would expire as to all acreage
not included in a drilling unit.
However, the original pugh
clause - that released acreage
based on surface area outside of
producing units - did not take into account that production in
one zone could still hold other formations that were possibly
productive and not being devel-
oped. Many mineral owners - while sophisticated for their era
- would discover that they still could not lease out acreage in un
-produced formations because
the lease covering the surface area was held-by-production by
a well producing in a different
formation.
This led to the development of the depth pugh clause. Before
continuing, though, it would be a
good moment to address the
next issue:
Confusion as to Industry Ac-
cepted Names of Surface and
Depth Pugh Clauses
No writing concerning pugh clauses would be complete with-
out referencing the ongoing
confusion as to the names of the
two main types of pugh clauses.
The depth pugh clause has been referred to in case law (i.e.,
written opinions given by appel-late courts) such as this case as
a “horizontal” pugh clause be-
cause the severance it creates is based on the producing for-
mation or subsurface horizon. In
the case linked to, the Second Circuit of the Court of Appeals of
Louisiana referred to the lease in
question as including a “Pugh Clause, [and] a depth restriction
after primary term clause (also called a ‘horizontal Pugh’
clause).”
However, other sources like this
one have taken the opposite approach and referred to sur-
face area pugh clauses as being
“horizontal” and a depth pugh clause as being called a
“vertical" pugh clause.
Some sources have additionally
been referring to surface area pugh clauses as "vertical." This
approach has gained traction in
recent years with an explanation that the surface is being cut
vertically like a pie and thus the proper terminology for a surface
area pugh clause is "vertical
pugh clause." A U.S. 5th Circuit
Court of Appeals case as early as 1992 referred to surface area
severances as "vertical pugh
clauses."
However, the Supreme Court of Louisiana in 2013 used the term
"horizontal pugh clause" to refer to surface area pugh clauses
and "vertical pugh clauses" to
refer to depth pugh clauses.
These terms have been used without any fixed meaning in the
legal system, furthering the
confusion in the oil and gas land
industry.
It should be noted that courts have not often addressed issues
surrounding pugh clauses and the industry naming practice
was not a substantive issue in
the few available cases discuss-ing pugh clauses, so the confu-
sion in case law is merely an issue to be aware of. The focus
for the land professional should
be on the substantive language
of the lease clause encountered.
This writing will not seek to ad-vocate for any particular naming
convention, but for continued
simplicity purposes will refer to
“surface” (or just plain "pugh
clause") and “depth” pugh claus-
es.
The Depth Pugh Clause
As mentioned, lessors began to
negotiate for depth pugh clauses in order to ensure that potential-
ly productive zones would not
come to be held by production in a different zone. The depth pugh
clause is an attempt to protect lessors from leaving money on
the table with potentially lost
bonus and royalty payments in zones not produced from under
the oil and gas lease.
The earliest depth pugh clauses
typically allowed lessors to re-tain all depths from the surface
to the stratigraphic equivalent of
the deepest depth drilled, or sometimes to the total feet
drilled which would occasionally leave a title chain ambiguity as
to actual formations under lease.
The problem with the early depth
pugh clause - from a mineral
owner perspective - was that it still allowed for un-produced
shallower formations to be held by production in a different,
deeper zone. However, from a
lessee perspective, the possibil-ity of re-completions at differ-
ent, shallower depths in a well that has already been drilled is a
valuable part of the lease that a
lessee should seek to retain even if it cannot retain past the deep-
est formation drilled to.
In some cases where the target
formation is anticipated to be profitable enough or the area
has known multiple formations,
lessors have been able to negoti-
ate for depth pugh clauses that
release all formations not pro-duced from, above and below. Or,
they simply include this depth restriction in the lease itself,
preferably near the legal de-
scription for easy identification. Oklahoma is one state which has
a strong history of production in many zones and has a sophisti-
cated lessor base negotiating
with lessees.
The Pooling Clause
The pooling clause in the oil and gas lease typically determines
unit size for the purpose of the
surface pugh clause.
However, not always.
Spacing Unit Surface Pugh
Clause
There have rare been instances identified by the author where it
has been specified in a surface pugh clause that the surface unit
referenced is the spacing unit or
the minimal spacing unit allowed
under field rules.
References to the spacing unit
appear to be done by lessors to
address the issue of an entire pooled unit being held by one
well when multiple wells could be
drilled under field rules.
This is a somewhat clumsy ap-proach from the lessor perspec-
tive as allowing the spacing unit
to be held still gives the lessee acreage in the drilling unit and a
working interest stake in any
future wells in the drilling unit.
Spacing unit references are rare in the author's experience. The
issue is better addressed with
the wellbore only pugh clause.
Update (8-11-15): While rare, the
importance of identifying when a pugh clause references the
much smaller spacing require-
ments in state field rules as opposed to the larger pooled unit
is very well illustrated here.
Wellbore Only Pugh Clause
The wellbore only pugh clause
releases all acreage outside the wellbore after the primary term
and extensions expire. This type of pugh clause has been a more
recent development and it is
typically coupled with a depth
pugh clause, as well.
Lessees are still protected from
third party drainage under state
spacing rules, but they do not retain acreage in the spacing
unit.
The wellbore only pugh clause is
typically seen only on leases that reflect a large acreage position
in a lucrative field which gave
the landowner significant negoti-ation power in lease negotia-
tions. For smaller mineral prop-erties, it may not make sense for
lessors and lessees to undergo
the added negotiation and draft-ing expenses associated with
wellbore only pugh clauses which require a high degree of custom-
ization to fit the needs of lessor
and lessee.
Additionally, inclusion of the
onerous wellbore only pugh clause may significantly reduce
the pool of interested lessees and reduce the lessor's negotiat-
ing power on other points in the
Page 3 DADOA Newsletter
The Pugh Clause:
Historical Development and Variations continued
oil and gas lease.
Horizontal Wells
With the advent of horizontal
shale wells, pugh clauses have
continued to be negotiated for by lessors, but have been modified
to accommodate horizontal drilling to varying degrees of
customization to the horizontal
drilling process.
Many mineral owners have at-
tempted to obtain pugh clauses that release all acreage outside
of the horizontal strip drained by the hydraulic fracturing process,
conceptually akin to a wellbore
only pugh clause for a vertical well. The actual language used
for these clauses can vary greatly with some clauses creat-
ing complex formulas including
length of the lateral line to de-termine acreage allocation for
each horizontal well. Other clauses simply establish a stated
amount of acres to be allocated
around each horizontal well's
lateral line.
Depth pugh clauses may also be added to restrict acreage to the
target zone or zones. When a shale play acreage includes
possible vertical well drill sites
as well, the issue of pugh clauses
becomes further complicated.
The way that pugh clauses have
been drafted by mineral owner
attorneys to make traditional vertical well concepts custom-
ized to horizontal drilling has led to many variations that require
close reading to fully understand
each time a new variation is
encountered. continued
Page 4 Volume VIII, Issue III
The Pugh Clause:
Historical Development and Variations continued
Activation of Pugh Clause
Depending on the wording of the pugh clause, a pugh clause may
be triggered either only once at
the end of the primary term or may be triggered on an ongoing
basis when production ends in producing units containing por-
tions of the lease.
Some leases contain language
stating that the lease must be
examined every X amount of years for releases owed or that
releases are owed any time and every time a unit stops produc-
ing. Due to their wording, many
leases containing early pugh clauses may have acreage held
even though one of the original producing units is no longer
active.
Release Owed
The partial release owed when a
pugh clause is activated is a
practical issue that some les-
sors have negotiated provisions
to specifically address.
Lessors may negotiate for a release to be owed after some
amount of days that a unit ceas-
es production or becomes inac-tive under the terms of the
lease. In these cases, lessees - with large administrative re-
sponsibilities already - would be
wise to ask for language stating that there is no penalty for fail-
ing to provide a partial release
unless the lessor specifically
asks for one.
When there is no clause govern-
ing the execution of and timing of
the partial release of lease owed when a pugh clause is triggered,
the danger for lessors is that there would remain a cloud on
title when a pugh clause has
unusual wording or there is room for interpretation in a
complex situation.
As pugh clauses have become more complex, some lessors in
lucrative areas have negotiated for a clause in the lease that
defines a process by which the
lessor reviews and approves the partial release prior to it being
issued.
Statutory Pugh Clause
Additionally, some state legisla-
tures have determined that lessors need to be protected
from a failure to negotiate for a pugh clause. These states have
enacted statutes that essentially
add a pugh clause to oil and gas leases taken after the effective
date of the statute.
Concluding Thoughts
There are possibly many addi-tional variations not covered
here. The above writing is not
meant to be an exhaustive listing
of all possible pugh clause per-
mutations.
There are potentially an infinite amount of variations to the pugh
clause as variations are limited
only by 1) the ability of mineral owner lawyers to draft new
twists and turns and terms and conditions to try to protect their
clients' interests, and 2) the
negotiating power of oil compa-nies and their representatives -
often with cash up-front bonus
payments in hand - to reject terms that are too onerous and
that go against company inter-ests in developing the lease by
limiting the potential upside to
successful development.
https://www.linkedin.com/pulse/20140709012517-48992161-
development-of-and-variations-to-the-pugh-clause?trk=hp-feed-article-title-
comment
Kaitlin grew up in Highlands Ranch, CO. She is an only child,
and she is very close to her
parents, who have always been loving and supportive. In 2013,
Kaitlin graduated from the Uni-
versity of Colorado at Boulder with a degree in Finance and
certificates in International
Business, as well as Operations
and Information Management.
In her free time, Kaitlin enjoys going to musicals, speed walking,
yoga, traveling, gardening, tend-
ing to her many plants, cooking, reading, and doing genealogy
research.
Kaitlin has been in the Oil & Gas
Industry for 3 years and 4 months, and has been a Division
Order Analyst for 9 months. She
got into the industry during the summer before her senior year
at CU, when she became a Land Analyst Intern at Encana Oil &
Gas. As an intern, she spent 3
months learning about the indus-try, the various roles and re-
sponsibilities in the Land Admin-
istration department, and work-
ing on her internship project.
Her internship project, which was her first real introduction
into Division Orders, involved researching owners whose funds
had reached the dormancy peri-
od, and she had to determine whether to release those funds,
move them into an escrow ac-count, or whether to escheat
them to the state. After her
internship, she was fortunate enough to continue working part
time at Encana throughout her senior year at CU. She worked
on various projects in Division
Orders and Lease records until she graduated in May of 2013.
Kaitlin spent a year and a half in
Lease Records learning about the importance of maintaining
Page 5 DADOA Newsletter
Analyst Spotlight
lease acreage, making timely
lease payments, and fulfilling
leasehold obligations. Kaitlin became a Division Order Analyst
in December 2014 and feels like she learns something new every
day.
The best advice she has received
is to not be afraid to ask ques-tions, and to build up strong
working relationships with as
many people as you can through-out the industry. There are so
many people in this industry who
have such an incredible knowledge base, and many of
them are very willing to share more information and tips that
you could possibly hope to know
– all you have to do is ask, and
then sit back and listen!
Kaitlin LaFlamme – Division Order Analyst – Encana Oil & Gas
Brandon was born and raised in
Eau Claire Wisconsin. He is the middle child of three kids; an
older sister and a younger brother. At the age of 21 he
saved some money and moved to
Fort Collins, Colorado with no immediate plan other than to ski
and explore life outside of Wis-
consin. He immediately fell in love with Colorado and has lived
here ever since. Brandon cur-
rently resides in Parker with his
wife Kimberly and their 10 month
old daughter Isabel.
Brandon enjoys music and film.
In his spare time he writes music
and plays guitar, bass guitar, and a handful of other assorted
instruments in his collection. He is also actively involved in Oil &
Gas industry advocacy and
awareness, and often volunteers at a variety of industry and com-
munity events.
In 2010, Brandon graduated from
Colorado State University with a B.A. in Economics and Business
Administration. While in college
Brandon applied for an intern-ship with Anadarko and was
hired as a Land Administration
intern in the summer of 2009,
and received a full time job offer
upon graduation in 2010. Bran-don is a proud and passionate
member of the Oil & Gas indus-try, and is very grateful to work
among the outstanding employ-
ees and companies in the Denver area. Brandon welcomes the
variety of challenges that Divi-sion Orders presents, and
thrives on the feeling of accom-
plishment when solving complex issues. Brandon highly values
teamwork and firmly believes that collective effort, creativity,
and genuine collaboration will
guarantee outstanding results.
Brandon is currently a member
of DADOA, DALTA, DAPL, and the Douglas County Energy Steering
Committee, which raises aware-
ness for the Oil & Gas industry
among the community in Douglas
County, CO.
Brandon’s advice to others in the
industry is to never stop learning
new things; always be open to explore the many facets of the
industry and your job. This will increase your knowledge sub-
stantially, keep your perspective
fresh and inevitably broaden
your horizons.
Favorite Quote: “No matter what happens, never stop doing your
best – it will come back tenfold
in unexpected ways”.
Brandon Wathke – Division Order Analyst II – Anadarko Petroleum
Page 6 Volume VIII, Issue III
Thar’s Treasure In Those Wa-
ters!!
If you ever get the chance to
attend an Annual Institute hosted by NADOA, I promise you will not
be disappointed. This year’s
pirate themed 42nd Annual event was held on Amelia Island off
Florida’s northernmost coast at the luxurious Ritz Carlton Hotel
and Resort. I was one of the
lucky recipients of the DADOA
Scholarship and feel both hon-
ored and blessed to have been
able to attend what will surely be a highlight of my career as a
division order analyst. Not only were we treated to every ameni-
ty the Ritz has to offer but we
were also immersed in the expe-rience and expertise of some of
our industries leading profes-sionals. The subjects that were
covered ranged from title and
unclaimed property issues to
better communication and Excel
Pivot Tables. After our classes concluded for the day we were
invited to attend the fun and festivities which included a Pi-
rate Costume Contest, live band,
and treasure hunt. There cer-tainly was plenty booty, loot and
spoils to be had. I want to thank DADOA for giving me this incredi-
ble opportunity.
NADOA Scholarship Winner
Tom Carrasco – Division Order Analyst at Encana Oil & Gas
NADOA 2015 Board Members
Our Purpose
- To further the education, knowledge, and interests of the professional Division
Order Analyst through the exchange of ideas and experiences in the problems and
opportunities that confront the Analyst in exploration, production, and marketing
of crude oil, gas, or other minerals and their associated by-products.
- To promote more effective communication between industry firms, personnel, and
the public with whom the Division Order Analyst is involved.
- To advance division order work as a profession.
- To foster friendly relations among the members of the Association through regu-
lar meetings and social functions.
- To sustain the integrity of the Division Order Analyst profession in the oil, gas,
and other minerals industry.
- To abide by and uphold the Code of Ethics of the Association.
Secretary
Julie Willis
Treasurer
Allison Blancett
President
Adam Sinclair
Vice President
Cori Peth
Director
Ilya Nudelman
Director
Wendy Hopkins
2015 Board of Directors
Have an article, photo, or other
ideas for the newsletter?
Denver Association of
Division Order Analysts
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Accomplished.
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Director
Lauren Dauer
Board Advisor
Linda Osminer
Adam Sinclair
720-876-3947
Katie Tate
303-831-9320
Kimberly Flores
303-640-4207
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