Held-By-Production Clause

What is a Held-By-Production Clause?

"Held by production" is a provision in an oil or natural gas property lease that allows the lessee, generally an energy company, to continue drilling activities on the property as long as it is economically producing a minimum amount of oil or gas. The held-by-production provision thereby extends the lessee's right to operate the property beyond the initial lease term. This provision is also a feature of mineral property leases.

How a Held-By-Production Clause Works

The held-by-production provision enables energy companies to avoid renegotiating leases upon expiry of the initial (primary) term and allows them to operate under a secondary term for the entire economic life cycle of an oil or gas field. This results in considerable savings to them, particularly in geographical areas that have become "hot" due to prolific output from oil and gas wells. With property prices in such areas generally on an upward trend, leaseholders would naturally demand significantly higher prices to renegotiate leases.

Habendum Clause

According to the law firm Holland & Hart, the held-by-production clause in a lease can also be called the habendum clause. A habendum clause in an oil and gas lease typically contains two separate terms, the primary term and the secondary term. The primary term is a fixed time period and expires at some point in the future. The time period under the secondary term is indefinite. So long as oil and gas are produced, the lease remains in effect. 

Mineral Rights Lease

Held by production is a type of mineral rights lease for the oil company, where the oil company operating the production facilities on another owner's land has a right to access the minerals or reserves on that land beyond the originally agreed lease term.

This issue is particularly important in the wake of the shale oil boom in the U.S. and Canada. Land with these shale resources can command considerable value. For some landowners, however, the shale boom is less welcome news because they have been cut out of the leasing windfall by held-by-production clauses.

Under held-by-production clauses, oil companies can retain control of the entire leasehold as long as there is at least one well producing a "minimum paying quantity" of oil or gas on the property. (Minimum paying quantities are generally defined as a value of oil production that exceeds operating costs.) This can create considerable conflict between landowners and the oil and gas companies operating there.

Examples of a Held-By-Production Clause

According to the Energy Mineral and Law Foundation, the use of held-by-production clauses increased dramatically after Range Resources, an independent natural gas company, began drilling extremely profitable horizontal, hydraulic fracturing wells in 2007 in Washington County, Pennsylvania.

When the industry became aware of Range’s successes with the new technique, other companies began leasing property for development at skyrocketing prices. The “competition for acreage caused lease prices to escalate from historical prices of $1 per acre to $500 per acre, then to $1,000 per acre, and then to as much as $10,000 and more per acre.”

In order to protect their investments from price rises, companies sought held-by-production clauses in their new leases, and in some cases they looked to buy old leases for poorly performing wells and use the new fracking technology to increase profits.