1
GLOSSARY OF OIL AND
GAS TERMS
Acreage-Contribution Agreement A support
agreement by which the contributing party agrees to
contribute leases or interests in leases in the area of
a test well to a drilling party in exchange for
information, if the drilling party drills to an agreed
depth and develops the information. See also
Support Agreements.
Ad Coelum Doctrine The common-law doctrine
that the owner of land owns everything above and
below the property’s boundaries from the heavens to
the core of the earth—including all the elements
therein. The complete maxim is cujus est solum, ejus
est usque ad coelum et ad inferos [Latin “to
whomsoever the soil belongs, he owns also to the
sky and to the depths”] The doctrine is still accepted
as the governing principle for hard minerals, but
has been replaced in the United States by the rule
of capture for fugacious minerals such as oil and
gas.
After-Acquired-Title Clause An oil and gas lease
clause that extends the coverage of the lease to any
interest in the described property acquired after the
lease. A common formulation is “This lease covers
all the interest now owned by or hereafter vested in
the lessor. . . .”
Apportionment Rule The rule followed in a
minority of states (including California, Mississippi,
and Pennsylvania) that royalties that accrue under
a lease on property that is subdivided after the lease
GLOSSARY
2
grant are shared by the owners of the property
proportionately to their interest in the property. See
also Non-Apportionment Rule.
Area-Rate Clause An indefinite price adjustment
clause found in some long-term gas contracts that
provides for increase of the contract price if any
regulatory agency permits or prescribes a higher
price for gas sold in the same area. Under the
regulatory scheme of the Natural Gas Act, from
1961 to 1978, maximum prices were set on an area
basis. Area-rate clauses were drafted to permit
sellers to collect the highest price permitted by the
regulatory authority in the relevant area.
Assignment Clause Another name for the Change-
of-Ownership Clause.
Associated Gas Natural gas that is found in
reservoirs along with and produced with oil.
Historically, much associated gas was flared
because there was no readily available market.
Bonus A payment to induce a lessor to execute the
lease.
Bottom-Hole Agreement A contract in which the
contributing party agrees to make a cash
contribution to the drilling party in exchange for
geological or drilling information, if the receiving
party drills to an agreed depth and conducts agreed
tests. See also Support Agreements.
Capture-and-Hold Rule The conventional
analysis that “production” occurs for royalty-
calculation purposes when oil or gas is captured and
held at the wellhead or on the lease. By this view,
GLOSSARY
3
the costs of transporting, compressing, and
processing, as well as severance and gross-
production taxes, are charged proportionately
against the royalty interest where royalty is
determined by working back from a downstream
price or value. See also Marketable-Product Rule.
Carried Interest A fractional interest, usually in
an oil and gas lease, free of some or all costs, which
are borne or carried by the remainder of the
working interest owners. A common arrangement in
drilling ventures is that the promoter is carried to
the casing point for 1/4 of the working interest; i.e.,
the investors will pay 100% of the drilling costs for
75% of the working interest. The promoter will bear
its 25% share of completion and operating costs
under such an arrangement.
Casing An industry term for pipe placed in a
wellbore hole. Surface casing protects potable
waters against pollution from drilling and producing
operations. Intermediate casing protects deeper
formations. Production casing is the pipe through
which oil and gas is produced.
Casinghead Gas Gas produced from the
casinghead (the top of the pipe) of an oil well.
Casinghead gas is natural gas held in solution with
oil in the production formation. At production or
shortly after, the gas separates from the oil.
Casing Point The point at which a well has been
drilled to the desired depth and the owners must
decide whether or not to place production pipe,
called casing, in the hole and proceed to complete
and equip the well for production.
GLOSSARY
4
Cessation-of-Production Clause An oil and gas
lease savings clause that specifies what a lessee
must do to maintain the lease in the event that
production ceases. The purpose of the cessation-of-
production clause is to make more certain the
temporary-cessation-of-production doctrine. See also
Temporary-Cessation-of-Production Doctrine.
Change-of-Ownership Clause An oil and gas
lease clause specifying what notice must be given by
the lessor or its assignee to the lessee of changes in
ownership to bind the lessee to recognize them. The
purpose of the clause is to protect a lease holder
against the consequences of making an improper
payment under the lease. Sometimes called an
Assignment Clause.
Coalbed Methane Natural gas extracted from coal
beds. Methane released from coal mining is a major
contributor to global warming, as well as a safety
hazard. Technology now makes it a major
unconventional resource.
Condensate The “wet” element of natural gas that
may be removed as a liquid. Used interchangeably
with Distillate and Natural Gasoline.
Continuous-Operations Clause A form of
Operations Clause.
Contribution Agreement Another name for a
Support Agreement.
Correlative-Rights Doctrine A corollary to the
rule of capture, that the right to capture oil and gas
from potentially producing formations under one’s
property is subject to the concomitant duty to
GLOSSARY
5
exercise the right without negligence or waste. See
also Rule of Capture.
Cost Depletion Recovery of one’s tax basis in a
producing oil or gas well by deducting basis
proportionately over the producing life of the well.
See also Percentage Depletion.
Cover-All Clause Another name for a Mother
Hubbard Clause.
Damages Clause A lease clause that imposes a
duty on the lease holder to pay the lessor or the
surface owner for damage, usually of a specified
type, to the surface. Often damages clauses are
limited to “growing crops.” In the absence of a
damages clause the lease holder has no legal
obligation to pay for “reasonable” damage to the
surface necessary to obtain oil and gas; the lessee
has an implied right to use the surface for oil and
gas operations.
Daywork Drilling Contract A drilling contract
under which the lease operator compensates the
drilling contractor on the basis of the amount of
time the contractor spends conducting drilling
operations. Essentially, the lease operator hires the
contractor’s drilling rig and staff to work under the
lease operator’s direction. A daywork drilling
contract gives broad discretion to the lease operator
to give instructions to the drilling contractor how to
conduct drilling operations. Courts impose broad
liability upon the lease operator as a result of its
broad discretion. See also Drilling Contracts.
GLOSSARY
6
Delay Rental A payment from the lease holder to
the lessor to maintain the lease from period to
period during the primary term without drilling.
See also Delay-Rental Clause, “Unless” Lease, “Or”
Lease, and Paid-Up Lease.
Delay-Rental Clause An oil and gas lease clause
giving the lessee the right to maintain the lease
from period to period during the primary term
either by commencing drilling operations or by
paying delay rentals. Leases contain delay-rental
clauses because courts have held that they avoid
any implied covenant to drill a test well on the
premises; a lessee who has the express right to
maintain a lease by paying rentals has no implied
obligation to drill. They are accepted by lessors
because they provide for periodic rental payments.
See also “Unless” Lease and “Or” Lease.
Distillate See Condensate. Also, any product of the
process of distillation.
Division Order An authorization to one who has a
fund for distribution from persons entitled to the
fund directing how the fund is to be distributed. In
the oil and gas industry, division orders are entered
into by both working interest owners and royalty
owners to sell oil and to give instructions for
payments under a lease.
Double-Fraction Problem A common
interpretative problem in conveyances that arises
when one who owns a fractional interest conveys or
reserves a fraction using language that is unclear
whether the grant or reservation is a fraction of
what the grantor owns or a fraction of the whole.
GLOSSARY
7
For example, if one who owns an undivided 1/2
interest in minerals conveys “an undivided 1/2
interest in the minerals,” it is uncertain whether the
grantor intended to convey a half interest in 100% of
the minerals or half of the grantor’s half.
Drilling Contracts Agreements for the drilling of a
well or wells entered into between drilling
contractors, who own drilling rigs and associated
equipment, and persons or entities owning or
operating mineral or lease rights. Drilling contracts
are generally structured to provide compensation on
a daywork, footage, or turnkey basis. The
compensation provision typically controls the scope
of discretion given to the operator to direct the
contractor and the amount of potential liability
imposed on the operator, as well as method of
payment. See also Daywork Drilling Contract,
Footage Drilling Contract, and Turnkey Drilling
Contract.
Dry-Hole Agreement A contract in which the
contributing party agrees to make a cash
contribution to the drilling party in exchange for
geological or drilling information, if the well drilled
is a dry hole. See also Support Agreements.
Dry-Hole Clause A provision in an oil and gas
lease specifying what a lessee must do to maintain
the lease for the remainder of the primary term
after drilling an unproductive well. A dry-hole
clause is intended to make clear that the lease may
be maintained by payment of delay rentals for the
remainder of the primary term.
GLOSSARY
8
Duhig Rule A rule of title interpretation developed
to deal with the frequent problem of
overconveyances of fractional interests. The court in
Duhig v. Peavy-Moore Lumber Co., Inc., 135 Tex.
503, 144 S.W.2d 878 (1940), first stated the rule,
which provides that where a grantor does not own
enough interest to give full effect both to the
granted interest and to a reserved interest, courts
will give priority to the granted interest (rather
than to the reserved interest) until the granted
interest is fully satisfied. The Duhig rule is
generally limited to conveyances by warranty deed.
Economic-Out Clause Another name for a gas-
contract Market-Out Clause.
Entirety Clause A clause in an oil and gas lease or
in a deed that states the agreement of the parties
that royalties are to be apportioned in the event
that the property is subdivided after the lease is
granted. The purpose of the clause is to avoid the
Non-Apportionment Rule.
Executive Right The right to lease specified land
or mineral rights. The executive right is one of the
incidents of the Mineral Interest.
Farmout Agreement An agreement by which one
who owns an oil and gas lease (the farmor) agrees to
assign to another (the farmee) an interest in the
lease in return for drilling and testing operations on
the lease or payment for them.
Favored-Nations Clause A contract clause that
provides for adjustment of the contract price upward
if another seller in the area receives a higher price.
GLOSSARY
9
Often seen in gas contracts and sometimes in oil
and gas leases.
Fee Interest A property interest of potentially
infinite duration. Sometimes used in the oil and gas
industry, to refer to ownership of both the surface
interest and the mineral interest.
FERC The Federal Energy Regulatory Commission,
the successor agency to the Federal Power
Commission (FPC). FERC is the agency responsible
for administering the Natural Gas Act.
FERC-Out Clause A gas-contract clause that
provides that the price paid to the producer shall be
reduced (or the contract terminated) to the extent
that the Federal Energy Regulatory Commission or
other regulatory agencies will not permit it to be
included in the regulated purchaser’s cost of service
(and, in effect, passed on to consumers).
Fixed-Term Lease An oil and gas lease for a fixed
period of time—e.g., 20 years—perhaps renewable
for an additional period of time, but without the
indefinite “so long thereafter” provision commonly
found in leases.
Footage Drilling Contract A drilling contract
under which the drilling contractor is compensated
on the basis of the footage drilled. The drilling
contractor is hired by the lease operator to drill to a
specified formation or depth and is given broad
discretion to make the management decisions
necessary to accomplish the task. The risk of
unexpected delays, as well as most liabilities, is
GLOSSARY
10
upon the drilling contractor rather than the lease
operator.
Force-Majeure Clause A lease or contract clause
that provides that the lessee will not be held to be in
breach if the lessee is prevented from performing by
force majeure (literally, “superior force”). Typically,
force-majeure clauses expressly indicate problems
beyond the reasonable control of the lessee that will
excuse performance.
Free-Gas Clause An oil and gas lease clause, found
commonly in leases on properties in colder states,
that entitles the lessor or the surface owner to use
without charge gas produced from the leased
property. Free-gas clauses are usually limited either
as to the uses permitted (e.g., domestic heating and
light) or as to the quantity that may be taken (e.g.,
not more than 300 MCF per year) or both.
Freestone Rider Another name for a Pugh Clause.
Fugacious Mineral A mineral whose liquid or
gaseous nature permits it to move from place to
place in response to pressure differentials and rock
permeability. Oil and natural gas are fugacious
minerals.
Further-Exploration Covenant An implied oil
and gas lease promise that, once production has
been obtained from the leased premises, the lessee
will continue to explore other parts of the property
and other formations under it. In some jurisdictions
courts have said that the covenant for further
exploration does not exist independently of the
implied covenant for reasonable development. See
GLOSSARY
11
also Reasonable-Development Covenant and
Reasonably-Prudent-Operator Standard.
Gas-Balancing Agreement A contract among
owners of the production of a gas well setting forth
their agreement for the balancing of production if
one owner sells more of the gas stream than other
owners.
Gas Contract An agreement for the sale of natural
gas.
Gas-Oil Ratio A limit to a Production Allowable
that requires an operator to stop producing when it
produces more than a designated ratio of gas to oil;
e.g., 2000 cubic feet of gas to one barrel of oil. A
gas-oil ratio is designed to preserve the reservoir
pressure.
Granting Clause The clause in the oil and gas
lease that spells out what rights are given by the
lessor to the lessee. Typically, an oil and gas lease
granting clause will specify what kinds of uses are
permitted and what substances covered by the
lease.
Greatest-Possible-Estate Rule The interpretive
rule that a deed or lease transfers the greatest
possible interest to the grantee and reserves only
that which it expressly reserves. See also 100%
Rule.
Habendum Clause The clause in an oil and gas
lease that defines how long the interest granted to
the lessee will extend. Modern oil and gas leases
typically provide for a primary term, a fixed number
of years during which the lessee has no obligation to
GLOSSARY
12
develop the premises, and a secondary term for “so
long thereafter as oil and gas produced” once
development takes place.
Horsehead See Pumping Unit.
Hydraulic Fracturing A production-stimulation
technique that improves the permeability of a
formation containing oil or natural gas by breaking
it, typically using a mixture of water, chemicals, and
proppants under high pressure. Sometimes referred
to as fracing or fracking.
Implied Covenant. An implied promise, usually in
an oil and gas lease, that imposes obligations on one
of the parties, usually the lessee. Though courts
describe lease implied covenants differently, there
are at least six: (1) the covenant to test the
premises, (2) the covenant to reasonably develop, (3)
the covenant to further explore, (4) the covenant to
protect against drainage, (5) the covenant to
market, and (6) the covenant of diligent and proper
operation.
“Lease implied covenants arise from the
ongoing relationship of the lessor and lessee
created by the lease. The lease gives the lessee
the exclusive cost-bearing right to explore and
develop the leased property, potentially in
perpetuity. The lessor has a cost-free interest in
production or revenues or value, but no right to
drill or produce. Because the typical oil and gas
lease makes the lessor’s royalty—the major
compensation for grant of the lease—dependent
upon the quantity and quality of the lessee’s
actions on the property, courts have concluded
GLOSSARY
13
that the lessee has an obligation to perform
certain unstated obligations. . . .” John S. Lowe,
Owen L. Anderson, Ernest E. Smith, David E.
Pierce, and Christopher S. Kulander, Cases and
Materials on Oil and Gas Law 178 (West 6th
ed. 2012).
Intangible-Drilling Costs Costs that (1) are
incurred incident to and necessary for the drilling
oil and gas wells and preparing them for production,
and (2) that have no salvage value. By § 612 of the
Internal Revenue Code, intangible-drilling costs
may be deducted in the year paid rather than
capitalized and depreciated.
Landman A position in the oil and gas industry
responsible for acquiring oil and gas leases, curing
title, negotiating arrangements for development,
and managing leased properties. A landman may be
either male or female.
Landowner’s Royalty The share of production or
production revenues or value, free of costs of
production, provided for the lessor in the royalty
clause of the oil and gas lease. See also Royalty
Interest.
Leasehold Interest Another name for the Working
Interest in a lease.
Leasehold Royalty Another name for the
Landowner’s Royalty.
Lesser-Interest Clause A lease clause that
permits a lessee to reduce payments under a lease
proportionately if the lessor has less than 100% of
GLOSSARY
14
the mineral interest. Sometimes called a
Proportionate-Reduction Clause.
Marketable-Product Rule The rule that
“production” for royalty-calculation purposes is not
complete until a lessee has both captured and held
the product and made it marketable. Until there is a
“marketable product,” the lessee must bear all costs
associated with capturing and handling oil and gas.
See also Capture-and-Hold Rule.
Market-Out Clause A long-term gas-contract
clause that provides that if the contract price for gas
purchased (plus certain costs incurred in getting it
to market) exceeds an amount that will permit the
gas purchaser to resell it profitably, the contract
price will be reset. Often market-out clauses are
drafted by referring to competing fuels, e.g., fuel oil.
Marketing Covenant The promise implied in oil
and gas leases that the lessee will market the
production from the lease within a reasonable time
and at a reasonable price. See also Reasonably-
Prudent-Operator Standard.
Maximum-Efficient Rate of Production The
amount that a well can produce in a given time
without damaging reservoir pressure or structure.
An increase of production beyond the “MER,” as it is
often called, will decrease the amount of oil or gas
ultimately recoverable. See also Production
Allowable.
MMBtu The abbreviation for one million British
Thermal Units, one of the standard heat-based
units of measurement for natural gas.
GLOSSARY
15
MCF The abbreviation for one thousand cubic feet,
one of the standard volumetric units of
measurement for natural gas.
Mineral Acre The full mineral interest in one acre
of land.
Mineral Interest The right to search for, develop,
and produce oil and gas (and other minerals) from
land, as well as (in some states) the right to present
possession of the oil and gas in place. The mineral
interest is granted by an oil and gas lease. See also
Fee Interest and Surface Interest.
Mineral Servitude Under the Louisiana Mineral
Code, a charge upon land in favor of a person or
another tract of land that creates a limited right to
use of the land to explore for and produce minerals.
Generally equivalent to a severed mineral interest
in a common-law state.
Mother Hubbard Clause A lease clause that
protects the lessee against errors in description of
property by providing that the lease covers all the
land owned by the lessor in the area. Sometimes
called a Cover-All Clause. Sometimes combined with
an After-Acquired-Title clause.
Natural Gasoline See Condensate.
Net-Profits Interest A share of production or
production revenues or value free of the costs of
production, to the extent that there is a net profit.
The methodology of defining net profits is crucial to
a net-profits interest.
GLOSSARY
16
Non-Apportionment Rule The rule—followed in
the majority of states—that royalties accruing
under a lease on property that has been subdivided
after the lease grant are not to be shared by the
owners of the various subdivisions but belong
exclusively to the owner of the subdivision where
the producing well is located. The non-
apportionment rule may be modified in an oil and
gas lease by an Entirety Clause. See also
Apportionment Rule.
Non-Associated Gas Natural gas found in fields
that contain no substantial amounts of oil.
Non-Executive Right An oil and gas interest that
does not possess the right to lease; e.g., a royalty
interest, a non-executive mineral interest.
Non-Ownership Theory The characterization of
oil and gas rights that a severed mineral interest
owner has merely a right to search, develop and
produce oil and gas from land, but not a present
right to possess the oil and gas in place. Because
there is no right to present possession, the interest
of a severed mineral interest owner in a non-
ownership theory state is akin to a profit a prendre,
a right to use the land and remove items of value
from it. Adopted in California, Louisiana and
Oklahoma, as well as various other producing
states. See also Ownership-In-Place Theory.
Nonparticipating Royalty A share of production,
or the value or proceeds of production, free of the
costs of production, carved out of the mineral
interest. A nonparticipating-royalty owner is
entitled to the stated share of production or cash
GLOSSARY
17
without regard to the terms of any lease.
Nonparticipating royalties are often retained by fee-
simple owners or mineral-interest owners who sell
their rights. See also Royalty and Overriding
Royalty.
No-Term Lease A lease that allows a lessee to
extend the primary term indefinitely by paying
delay rentals or nominal fixed royalties.
Obstruction An equitable doctrine that suspends
the running of time under a lease or extends the
lease for a reasonable time if the lessor or one
claiming through the lessor interferes with rights
granted by the lease. Some courts apply the
obstruction doctrine to interference by a severed
surface owner.
Oil Payment Another term for a Production
Payment.
100% Rule The principle of legal interpretation
that a land description that is not limited is
considered to describe 100% of both the surface and
the minerals. See also the Greatest-Possible-Estate
Rule.
Operating Agreement A contract among owners
of the leasehold interests in a producing oil or gas
well or wells setting forth the parties’ agreement
about drilling, development, operations, and
accounting.
Operations Clause A clause frequently found in
oil and gas leases providing that the lease will
continue so long as operations for oil and gas
development continue on the premises. Two
GLOSSARY
18
common variations are the well-completion clause
and the continuous-operations clause. A well-
completion clause provides that a lessee who starts
drilling before the lease terminates has the right to
complete the well and to maintain the lease if the
drilling achieves production. A continuous-
operations clause gives a lessee the right not only to
continue drilling a well begun before termination
but also to commence additional wells.
“Or” Lease An oil and gas lease with a delay-rental
clause structured so that the lessee promises to
commence drilling operations or to pay delay rentals
from time to time during the primary term. If the
lessee fails to do one or the other, the lease does not
automatically terminate; instead the lessee is liable
to pay the delay rental.
Overriding Royalty A share of production, or the
value or proceeds of production, free of the costs of
production, carved out of a lessee’s interest under an
oil and gas lease. Overriding-royalty interests are
frequently used to compensate those who have
helped to structure a drilling venture. An
overriding-royalty interest terminates when the
underlying lease terminates. See also Royalty and
Nonparticipating Royalty.
Ownership-in-Place Theory The characterization
of oil and gas rights that a fee-simple or mineral-
interest owner owns the right to present possession
of the oil and gas in place as well as the right to use
the land surface to search, develop and produce
from the property. Adopted in Texas, New Mexico,
Kansas, Mississippi, and other major producing
GLOSSARY
19
states. The rights of a severed mineral-interest
owner to oil and gas in these states are often
described as an estate in fee simple absolute, but
ownership of specific oil and gas molecules is subject
to the rule of capture even in ownership-in-place
theory states. See also Non-Ownership Theory.
Paid-Up Lease An oil and gas lease that does not
provide for delay-rental payment. The lease is
effective for the whole period of the primary term.
Partition The division of undivided interests, in
kind or by sale, by voluntary agreement or judicial
action.
Paying Quantities An amount of production that
is marginally profitable in that operating revenues
exceed operating costs over a reasonable period.
Generally the standard to extend and maintain a
lease during the secondary term.
Percentage Depletion A provision of § 611 of the
Internal Revenue Code that permits a taxpayer who
owns an economic interest in a producing oil or gas
well to deduct a specified percentage of the gross
income from the well in lieu of depleting the actual
basis. See also Cost Depletion.
Permeability A reference to the degree of
interconnectivity of the pore space in a petroleum
formation. The higher the permeability, the easier
it is for oil or gas in the formation to move in
response to pressure.
Petroleum Conservation Law A state law that
limits the rule of capture and defines the
correlative-rights doctrine by regulating the drilling
GLOSSARY
20
and operation of oil and gas wells. Petroleum
conservation laws are intended to prevent waste
and protect correlative rights.
Pooling Bringing together, either by voluntary
agreement (voluntary pooling) or by order of an
administrative agency (compulsory or forced
pooling), small tracts or fractional interests to drill a
well. Pooling is usually undertaken to comply with
well-spacing requirements established by state law
or regulation. Pooling is usually associated with
drilling a single well and operating that well by
primary-production techniques, while Unitization
usually involves numerous wells using secondary or
tertiary-recovery techniques, though the terms are
sometimes used interchangeably.
Pooling Clause A clause found in most leases that
grants the lessee the power to combine part or all of
the leased acreage with other properties for
exploration, development, or operation. A pooling
clause is different from a Unitization Clause
primarily in that it is usually subject to acreage
limitations that make unitized operations difficult.
Porosity A reference to the amount of space
between the grains of sedimentary rock in which
petroleum may be found. The higher the porosity,
the more room for oil or gas to be held.
Prescription A Louisiana doctrine that
extinguishes unused mineral servitudes after 10
years. To interrupt the running of the prescription
period, there must be operations to discover or
produce on the land or land pooled with it.
GLOSSARY
21
Price-Adjustment Clause A long-term gas
contract provision providing for adjustment of the
base price provided for in the agreement.
Adjustment may be up or down.
Price-Renegotiation Clause A clause in a gas
contract providing for price renegotiation from time
to time or upon election of one of the parties.
Primary Recovery Oil or gas production that
occurs because of the pressure differential between
the formation where the oil or gas is located and the
borehole, though the primary recovery includes oil
produced using pumping units or other artificial-lift
mechanisms. See also Secondary Recovery and
Tertiary Recovery.
Primary Term The option period—set by the oil
and gas lease habendum clause—during which the
lessee retains the right to search, develop and
produce from the premises without having any
obligation to do so. The primary term should be
sufficiently long to permit the lessee to evaluate the
property and make arrangements to drill it. In
practice, the primary term may extend for 24 hours
or 25 years, depending upon how much competition
there is for leases in the area. See also Habendum
Clause and Secondary Term.
Production Allowable Limits on production of oil
and gas to prevent overproduction and share it
equitably among the common owners. See also
Maximum- Efficient Rate of Production.
Production Payment A share of production or the
value or proceeds of production from property, free
GLOSSARY
22
of the costs of production, that terminates when an
agreed amount or sum has been paid; e.g., “1/5 of all
oil and gas produced and saved from said land until
the market value at the well of such production
shall aggregate One Million Dollars. . . . ” See also
Oil Payment.
Profit a Prendre At common law, the right to
enter the land of another and take away some fruit
of the soil. In many states mineral rights or oil and
gas leases are classified as profits a prendre.
Proportionate-Reduction Clause Another name
for the Lesser-Interest Clause.
Protection Covenant The promise implied in an
oil and gas lease that the lessee will protect the
premises against drainage by drilling a producing
well to the reservoir that is subject to drainage, if a
reasonably prudent operator would do so. See also
Reasonably-Prudent-Operator Standard.
Pugh Clause A lease clause (sometimes called a
Freestone Rider in Texas) modifying the effect of
most lease pooling clauses by severing pooled
portions of the lease from unpooled portions of the
lease so that drilling or production on a pooled
portion will not maintain the lease as to unpooled
portions.
Pumping Unit Equipment used to pump oil to the
surface when the pressure differential between the
pressure in the formation and in the borehole is
insufficient to cause oil to rise up the borehole to the
surface. Sometimes called a pumpjack or horsehead.
Pumpjack Another term for a pumping unit.
GLOSSARY
23
Reasonable-Development Covenant The
promise implied in oil and gas leases that, once a
lessee obtains production, the lessee will continue to
develop the premises as would a reasonably prudent
operator rather than merely holding the lease by the
production already obtained. See also Further-
Exploration Covenant.
Reasonably-Prudent-Operator Standard The
test generally applied to determine a lessee’s
compliance with implied lease covenants. The term
refers to what a reasonable, competent operator in
the oil and gas industry, acting in good faith and
with economic motivation, and taking into account
the lessor’s interests as well as its own, would do
under the circumstances. Also called the reasonable-
prudent-operator standard and the prudent-operator
standard.
Regulatory-Out Clause Another name for a
FERC-Out Clause.
Rental-Division Order A stipulation signed by
those entitled to delay rentals stipulating their
interests and how much rental each is to receive.
Reservoir The term used to describe a geologic
formation in which oil and gas is trapped.
Royalty Interest A share of production, or the
value or proceeds of production, free of the costs of
production, when and if there is production. Royalty
is usually expressed as a fraction; e.g., 1/6. A
royalty-interest owner has no right to operate the
property, and therefore no right to lease or to share
in bonus or delay rentals. In some states a royalty
GLOSSARY
24
owner has the right of access and egress to take the
royalty production. There are several different, but
related, kinds of royalty interests. See e.g.,
Landowner’s Royalty, Nonparticipating Royalty, and
Overriding Royalty.
Rule of Capture The fundamental principle of oil
and gas law that there is no liability for capturing
oil and gas that drains from another’s lands. The
owner of mineral rights in a tract of land acquires
title to the oil and gas produced from wells drilled
on the land, though part of the oil and gas may have
migrated from adjoining lands.
Secondary Recovery The second stage of oil or
gas production, typically involving injection of water
or gas or both to maintain or restore a high pressure
differential between the formation where the oil or
gas is located and the borehole. See also Primary
Recovery and Tertiary Recovery.
Secondary Term The term of the oil and gas lease
after production has been established, typically “as
long thereafter as oil and gas is produced from the
premises.” See also Habendum Clause and Primary
Term.
Separator Equipment used at the well site to
separate oil, water, and gas produced in solution
with oil. Basic separators simply heat oil to speed
the natural separation process. More complex
separators may use chemicals.
Severance A transfer or reservation of a part of the
“bundle of rights” that make up property ownership.
Mineral rights are frequently “severed” from surface
GLOSSARY
25
rights in property that may contain oil and gas or
other minerals.
Shale A fine-grained sedimentary rock that can be
a rich source of oil and natural gas. Shale-gas and
shale-oil production have rejuvenated the petroleum
industry in the United States and may soon make
the United States energy independent.
Shut-In Royalty Clause A lease provision
permitting the lessee to maintain the lease while
there is no production from the premises because
wells capable of production are not producing. The
lessee pays the lessor a “shut-in royalty” in lieu of
production.
Subrogation Clause A lease provision permitting
the lessee to pay taxes, mortgages, or other
encumbrances on the leased property and to recover
those payments out of future proceeds from the
lease.
Support Agreements Contracts in the oil and gas
industry that encourage and “support” exploratory
or development operations. Generally, one party
agrees to contribute money or property to another if
the other will drill a well on leases that it holds and
provide the contributing party with information
from tests conducted. For the contributing party, a
support agreement is a purchase of geological or
technological information. For the party receiving
the support, the contribution lessens the cost or the
risk of drilling operations. For further discussion,
see Contribution Agreement, Acreage-Contribution
Agreement, Bottom-Hole Agreement, and Dry-Hole
Agreement.
GLOSSARY
26
Surface Interest All rights to property other than
the mineral interest. The surface interest has the
right to the surface subject to the right of the
mineral-interest owner to use it to search for,
develop, and produce minerals. The surface interest
is entitled to all substances found in or under the
soil that are not defined as minerals.
Surrender Clause A clause commonly found in an
oil and gas lease authorizing a lessee to release its
rights to all or any portion of the leased premises at
any time and be relieved of further obligations
relating to the acreage surrendered.
Take-or-Pay Clause A gas-contract clause that
requires the buyer either to purchase and take
agreed quantities of gas, or to pay for the gas even
though it has not taken it.
Temporary-Cessation-of-Production Doctrine
The rule that an oil and gas lease term “for so long
thereafter as oil and gas are produced” will not
terminate once the lease owner attains production
unless the cessation of production is for an
“unreasonable” length of time, taking into account
all of the facts and circumstances. See also
Cessation-of-Production Clause.
Term Clause Another name for the Habendum
Clause.
Term Interest A mineral interest or royalty
interest that is not perpetual. A term interest may
be for a fixed term (e.g., for 25 years) or a defeasible
term (e.g., for 25 years and so long thereafter as
there is production from the premises).
GLOSSARY
27
Tertiary Recovery The third stage of oil or gas
production, involving injection of chemicals,
hydrocarbons, carbon dioxide, or steam to maintain
formation pressure and to improve the flow of oil
and gas through the formation to the borehole.
Sometimes called enhanced recovery. See also
Primary Recovery and Secondary Recovery.
Top Lease A lease granted on property already
subject to an oil and gas lease. Generally, a top lease
grants rights if and when the existing lease expires.
Turnkey Drilling Contract A drilling contract
under which a drilling contractor agrees to perform
stated functions for an agreed price. The lease
operator has little or no discretion to instruct the
drilling contractor and little or no liability exposure
for the contractor’s actions.
Unconventional Resource A petroleum resource
that is different from those historically produced,
either with respect to the characteristics of the
reservoir or the production techniques being used.
As this is written, coalbed methane, shale gas, shale
oil, and oil-sands production are all considered
unconventional resources.
Unitization Bringing together some or all of the
well-spacing units over a producing reservoir for
joint operations, either by agreement of the owners
(voluntary unitization) or by order of an
administrative agency (compulsory or “forced”
unitization). Unitization is usually undertaken after
primary production has begun to fall off
substantially to permit efficient secondary or
tertiary-recovery operations. In the oil and gas
GLOSSARY
28
industry, the term is sometimes used
interchangeably with Pooling.
Unitization Clause A lease provision granting the
lessee the right to unitize the leased premises,
generally for secondary or tertiary-recovery
operations. Unitization clauses are unusual in
leases; generally mineral owners resist including
them because of the discretion they give lessees.
See also Pooling Clause.
“Unless” Lease An oil and gas lease with a delay-
rental clause structured as a special limitation to
the primary term. The lease automatically
terminates, though the lessee has no liability for its
failure to perform, “unless” the lessee pays delay
rentals or commences drilling operations.
Warranty Clause A deed or lease clause by which
a grantor guarantees that title has no defects and
agrees to defend it. If the warranty is breached, the
grantor may be liable to the grantee to the extent
that the grantor has received payments. The
presence of a warranty clause in a mineral deed or
oil and gas lease may also cause after-acquired
interests to pass from the grantor to the grantee by
application of estoppel by deed.
Water-Oil Ratio A limit to a Production Allowable
that requires an operator to stop producing when it
produces more than a designated ratio of water to
oil; e.g., six barrels to one. A water-oil ratio is
designed to preserve the pressure in a water-drive
reservoir.
Well-Completion Clause See Operations Clause.
GLOSSARY
29
Working Interest The rights to the mineral
interest granted by an oil and gas lease, so-called
because the lessee acquires the right to work on the
leased property to search, develop, and produce oil
and gas (and the obligation to pay all costs).
Sometimes called Leasehold Interest.
GLOSSARY
30