“Held by production” is a provision in an oil or natural gas property lease that allows the lessee, usually an energy company, to continue drilling activities as long as the property is economically producing a minimum amount of oil or gas. This provision extends the lessee’s right to operate beyond the initial lease term, and is commonly featured in mineral property leases.
Key Takeaways
- Held-by-production clauses enable miners of oil, gas, and minerals to extend their land leases after they expire, provided the mines are still productive.
- These clauses are also known as “habendum” clauses.
- They allow mining companies to lock in a lease price in areas of high production potential, protecting their investments from price hikes.
How a Held-By-Production Clause Works
The held-by-production provision allows energy companies to avoid renegotiating leases upon the expiry of the initial (primary) term, granting them operational rights under a secondary term for the entire economic lifespan of an oil or gas field. This results in significant savings, particularly in high-output areas where property prices tend to rise. Without this clause, leaseholders might demand much higher prices to renew leases in such prolific regions.
Habendum Clause
A held-by-production clause is often called a habendum clause, which defines two terms: the primary term and the secondary term. The primary term has a fixed time period and eventually expires, while the secondary term is indefinite. As long as oil and gas are produced, the lease remains in effect.
Mineral Rights Lease
Held by production is a form of mineral rights lease, permitting an oil company to continue accessing minerals or reserves on another owner’s land beyond the initially agreed lease term. This is particularly relevant in the aftermath of the shale oil boom in areas such as the U.S. and Canada, where land value has surged. For some landowners, these clauses are less favorable since they exclude them from reaping the leasing rewards.
Under such clauses, oil companies can retain the leasehold as long as at least one well produces a “minimum paying quantity” of oil or gas. This term typically refers to a production value that exceeds operating costs, potentially leading to disputes between landowners and oil and gas companies.
The Impact of Held-By-Production Clauses
The use of held-by-production clauses surged after the success of Range Resources, an independent natural gas company, which began drilling highly profitable horizontal, hydraulic fracturing wells in 2007 in Washington County, Pennsylvania. As the industry recognized the profitability of this technique, competition for acreage intensified, driving lease prices from $1 per acre to up to $10,000 and more per acre.
To safeguard their investments from these escalating prices, companies sought held-by-production clauses in new leases, and sometimes acquired old leases for underperforming wells, implementing new technologies like fracking to dramatically boost production and profitability.
Related Terms: lease agreement, lessee, habendum clause, fracking, horizontal drilling.
References
- Holland & Hart. “The Habendum Clause - ‘Til Production Ceases Do Us Part”.
- Energy & Mineral Law Foundation. “Held By Production Leases: When Are They Actually Held?” Page 965.
Get ready to put your knowledge to the test with this intriguing quiz!
---
primaryColor: 'rgb(121, 82, 179)'
secondaryColor: '#DDDDDD'
textColor: black
shuffle_questions: true
---
markdown
## Which of the following best defines the 'Held by Production' clause in an oil and gas lease?
- [x] A clause stating that the lease remains valid as long as the land is producing oil or gas in paying quantities
- [ ] A clause specifying the minimum royalties to be paid to the lessor
- [ ] A clause regulating the drilling depths allowed under the lease
- [ ] A clause determining the termination date of the lease agreement
## When does the 'Held by Production' clause automatically extend the lease duration?
- [ ] Only if new wells are drilled every year
- [ ] If the lessee signs a renewal contract with the lessor
- [x] As long as the land yields oil or gas in marketable quantities
- [ ] If the lessee decides to upgrade the extraction technology
## What is one of the primary benefits of the 'Held by Production' clause for lessees?
- [ ] It provides a guaranteed income regardless of production levels
- [ ] It demands frequent renegotiation of lease terms
- [x] It offers longevity of the lease without the need for re-signing as long as production continues
- [ ] It obliges the lessor to cover extraction costs
## Which scenario would not sustain a lease despite the 'Held by Production' clause?
- [x] Production ceasing and not resuming within the specified timeframe
- [ ] Continuous extraction of oil or gas in paying quantities
- [ ] Upgrades made to the extraction infrastructure
- [ ] Initiation of additional drilling activities on-site
## What main aspect of the oil and gas industry does the 'Held by Production' clause address?
- [x] Secure lease tenure linked to constant production levels
- [ ] Workers’ safety regulations
- [ ] Environmental conservation policies
- [ ] Distribution logistics for extracted resources
## Which party primarily benefits from the inclusion of a 'Held by Production' clause?
- [ ] Government regulatory agencies
- [ ] Property owners
- [x] The leasing oil and gas company
- [ ] Local communities near the extraction sites
## Besides consistent production volumes, what else can affect the enforcement of the 'Held by Production' clause?
- [x] Market prices for oil and gas falling below profitable levels
- [ ] Regular leaseholder meetings
- [ ] The amount of acreage leased
- [ ] Internal policies of the extraction companies
## In the context of a 'Held by Production' clause, what is generally meant by "paying quantities"?
- [ ] Any produced amount sufficient to cover local community needs
- [ ] Any amount sufficient to pay for machinery maintenance
- [x] The extracted quantities that enable profitable operations after covering expenses
- [ ] Quantities sufficient to supply every leasing company employee
## Which document primarily contains the 'Held by Production' clause in the oil and gas industry?
- [ ] A sales contract
- [x] The lease agreement between lessor and lessee
- [ ] A safety compliance report
- [ ] An environmental impact assessment
## What action could potentially void a lease held "Held by Production" despite consistent production?
- [ ] Regular maintenance of drilling equipment
- [x] Failure to pay royalties as agreed
- [ ] Following federal energy regulations
- [ ] Transparent reporting of production figures
