Mineral and land owners in Ohio who are presented with a proposed lease from a landman or oil company often launch an intense study of royalty provisions, development covenants, delay rentals, Pugh clauses, well spacing and the like. They often refer to the Internet, land owner groups, owner-oriented attorneys and other resources. Like so many things, it turns out that our forefathers pretty much had it figured out. I recently reviewed a 1901 oil and gas lease from Putman County; my thoughts and observations are below.

The lease was granted by Noah Moser to The Sun Oil Co., an Ohio corporation, on Sept. 19, 1901. The recordation of this transaction is hand written into the Putman County records by the recorder. The consideration, what is today called the “signing bonus,” was $80 for a 160-acre parcel. (In today’s dollars, that’s an “economic power” of $56,300, or $352 per acre.)

In the two-page document, Mr. Moser granted all the oil and gas in and under the described premises together with the right to enter at all times for the purpose of drilling and operating for oil, gas or water. This included the right to erect, maintain and remove all buildings, structures, pipelines and machinery necessary, provided that Mr. Moser retained the right to farm the land not actually used. Just what one would expect. But here’s where Mr. Moser shows he knew what he was doing:

  • The grant would become null and void if a well was not completed within 90 days. A payment of $20 per month, now called a “delay rental,” would prevent the termination.
  • Should oil be found in paying quantities, a royalty of 1/6 of the oil produced was to be delivered to Mr. Moser. (Later, a 1/8 royalty would become the de facto standard.)
  • If gas were found in paying quantities, Mr. Moser would receive $100 annually, and he had the right to use free gas to heat and light his house.
  • Pipelines were to be buried, if Mr. Moser so requested.
  • “No well shall be drilled nearer than 300 feet to any building on this premises.” This set back requirement is analogous to today’s standards.

Express Development Provision With a Pugh Clause

There are no pooling or unitization clauses as we know them today, but the lease does contemplate that the described premises could be operated jointly with adjoining property. Though the oil company might say that such provisions are necessary for the efficient operation of wells on contiguous land, others would argue that they lead to abuse by the oil company, which could thereby hold acreage without developing it. The debate continues to this day.

Did the oil company hoodwink Mr. Moser? Hardly. The lease goes on to provide that 30 days after the last producing well was drilled:

“this lease shall become null and void and all rights hereunder shall cease and terminate excepting as to 10 acres around each well already completed unless second party [the oil company] shall complete one additional well each 90 days after the completion of the first well, until 6 wells are completed, unavoidable accidents and delays excepted.”

An express development clause — and a harsh one by today’s standards — enforced, remarkably, by what we call today a Pugh clause! A Pugh clause is the language used in an oil and gas lease to spell out what happens to the portion of the leased acreage that does not either contain a well or is not included within a producing petroleum pool or unit. They can be horizontal and/or vertical.

The conventional wisdom is that a Pugh clause is named after Lawrence Pugh, a Crowley Louisiana attorney who developed the clause in 1947, apparently in response to the Hunter v. Shell Oil Co., 211 La. 893 (1947), which was considered by some to unfairly favor the oil company. In this case, the Louisiana Supreme Court held that production from a unit including a portion of a leased tract will maintain the lease in force as to all lands covered by the lease even if they are not contiguous.

Also note the 10-acre spacing, which was incorporated into the Ohio Revised Code in the mid-1960s, as appropriate for shallow wells.

Mile-long horizontal wells and fracking are revolutionary, no doubt. But the tensions, principles, concepts, contracts and laws that govern them are only evolutionary. So, for his day, and only 20 years after northwest Ohio became a major source of oil, Mr. Moser was well-informed or well-counseled. Members of the Moser family still own the land.