Real property ownership is often depicted on 2-dimensional maps or plats having North-South and East-West coordinates. Two dimensions are adequate when property rights only involve surface uses of the earth or near-surface uses like easements, utility lines or cable. Two dimensions even work when mineral leases cover subsurface property rights so long as all the mineral rights for any given area are held by the same parties.

However, oil & gas leases often have vertical dimensions that grant drilling and extraction rights to only stated levels. These provisions, often called Pugh clauses after the lawyer who originated them, permit lessees to keep rights to produce only down to the depths from which they have actually produced during the initial term of the lease. Basically, lessees have to either develop their leases to benefit the land owners by producing and selling oil or gas, or give up parts or all of their leases. For example, the following Pugh clause was litigated in Sandefer Oil & Gas, Inc. v. Duhon:

“After expiration of the primary term, this lease will terminate automatically as to all horizons situated 100 feet below the deepest depth drilled … from which a well located on the land or acreage pooled therewith is producing in paying quantities”

During the initial period of the lease, Sandefer drilled down 17,609 feet but only produced oil from a layer of sand at a depth of between 17,100 and 17,250 feet. Sandefer wanted to keep production rights for depths down to 100 feet below the deepest part of the well, i.e., to 17,700 feet. The Court rejected that position and held that the lessee was only entitled to retain production rights down to 100 feet below the layer from which oil had been produced, not the bottom of the well. This was a critical difference because there was a second oil-producing layer beneath the first one that would have been included within the lease if the deeper depth had been accepted by the court.

The court also held that the land owners were entitled to an accounting for oil produced from a second well drilled into that lower level after the initial lease term expired to the extent that lower layer was more than 100 feet below the initial producing layer.

As may be obvious, there can be significant financial consequences for production occurring in violation of Pugh clauses, especially if there have been large volumes over many years. Some sort of three-dimensional analysis is needed to determine if those violations have occurred. However, land holders and especially fractional interest holders may not have the expertise or resources to obtain and interpret the variety of documents from county/parish land records and state regulatory filings needed to determine:

  • Was there a Pugh clause?
  • Was it violated?
  • What are the possible damages?

This type of analysis is normally conducted manually on a lease-by-lease basis, a time-consuming and expensive process. However, another option is to perform the analysis in bulk by automating the process of acquiring and analyzing the necessary records, starting with scanning land title records for counties or parishes and gathering state oil and gas regulatory records like drilling permit applications and production reports.

In one project involving BeyondRecognition technology, visual classification identifies oil & gas leases from among all the other documents filed in a county clerk’s land recording office. Individual Pugh clauses are then programmatically extracted from the leases so that like clauses can be grouped together for efficient processing. Information about the Pugh restrictions are then compared to data extracted from state filings that have relevant information about drilling depth, dates and volumes of production, etc. Common data elements across documents, e.g., API well numbers and GPS coordinates of the lease and the well, enable this largely automated extraction and analysis of key data elements.


To download your free personal-use copy of my book, Guide to Managing Unstructured Content, go to:
http://beyondrecognition.net/download-john-martins-guide-to-managing-unstructured-content/

References:

https://en.wikipedia.org/wiki/Oil_and_gas_law_in_the_United_States
Sandefer Oil & Gas, Inc. v. Duhon, 961 F. 2d 1207, Court of Appeals, 5th Circuit 1992: https://scholar.google.com/scholar_case?case=137857001813057257

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