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Held by Production Clause

Definition

The Held by Production Clause, in oil and gas leases, allows the lease to continue as long as the property is producing oil or gas in paying quantities, even after the primary term has ended. Simply put, once production begins, the lease remains in effect for as long as the property continues to produce. This clause ensures an extended tenure of the lease and uninterrupted production operations.

Phonetic

The phonetics for “Held by Production Clause” is:Held: /hɛld/ by: /baɪ/ Production: /prəˈdʌkʃən/ Clause: /klɔːz/

Key Takeaways

Understanding the Held By Production Clause is critical in the oil and gas industry, especially when it comes to lease agreements. Here are the three main takeaways about this clause:

  1. Continued Operations: The Held By Product Clause, or HBP, essentially allows the lessee to keep a lease indefinitely, as long as the property continues to produce a minimum amount of oil or gas. This means that the lease does not end after its primary term but will continue to be in effect as long as production is occurring.
  2. Securing Rights and Interests: The HBP clause provides security for the lessee, allowing them to continue producing oil or gas without worrying about the lease expiring. It helps them protect their investments in drilling and operating the wells. On the other hand, it also secures the lessor’s (usually the landowner’s) ongoing royalty interest for the life of the lease.
  3. Legal Implications: The interpretation and enforcement of the HBP clause may vary depending on the state laws, court rulings, and specific wording of the lease agreement. It is thus essential for both the lessee and lessor to thoroughly understand the provisions of the HBP clause and its implications to avoid potential legal disputes.

Importance

The Held by Production Clause (HBP) is a crucial provision in the field of business and finance, particularly in the oil, gas, and mineral industry. This clause allows the lease terms to continue indefinitely beyond its primary term as long as the property is producing a specified quantity of mineral resources – oil or gas. Thus, it is important as it ensures the continuous extraction and production of these resources without the need to regularly renew the contract. This benefits the lessee by providing sustained rights to production and enhancing the operational efficiency, while also protecting the lessor’s interests by ensuring continuous royalty payments. Therefore, the HBP clause is a strategic element balancing the interests of both parties in a productive arrangement.

Explanation

The Held by Production Clause, in oil and gas leases, serves a significant purpose in ensuring that drilling companies maintain their leasing rights to the property once its initial term of lease has expired. This clause plays a critical role in the natural resources industry by allowing leasehold rights to extend indefinitely as long as the land is still producing oil or gas in paying quantities. Thus, after the initial fixed lease period, this clause helps the drilling companies prevent the reversion of their mining rights back to the landowner provided they continue with the production.This clause is typically used in oil and gas lease contracts, providing greater flexibility and investment protection to the drilling companies. The Held by Production Clause allows them to exercise their lease rights for as long as the well they’ve drilled continues to produce, facilitating long-term planning and investment in expensive drilling operations. Furthermore, it instills a level of confidence in them as it eliminates the need to renegotiate leases or face lease expiration during production. Simply, the Held by Production Clause assures that the continuous flow of resources allows continuous rights to a leased property.

Examples

1. Oil and Gas Leases: One of the most common real world examples of the Held by Production clause is seen in oil and gas leases. Consider a company like ExxonMobil who leases land from private landowners or government entities to conduct their operations. The leases usually have a primary term during which ExxonMobil is expected to begin production. If they don’t start production within that time, the lease expires unless they pay an extension fee. However, if they do begin production, the held by production clause comes into play and the lease remains valid for as long as the well or mine continues to produce.2. Gold Mining Companies: Similarly, held by production clauses can also be observed in the operations of gold-mining companies like Barrick Gold. They often lease large tracts of land for their mining operations and similar to the oil and gas industry, these leases generally contain a held by production clause. This means as long as gold production is ongoing, the lease doesn’t expire, allowing the company to continue mining operations over a potentially long lease.3. Coal Mining: The same principle applies to coal mining operations such as those run by companies like Peabody Energy. Coal companies lease land to excavate and as long as coal production continues, the lease remains in effect due to the held by production clause. This ensures the companies can continue to mine coal until the resource is exhausted without worrying about renegotiating and extending contracts.

Frequently Asked Questions(FAQ)

What is the Held By Production Clause?

The Held by Production Clause or HBP is a stipulation in an oil or gas lease that extends the lease beyond the primary term. As long as the leased area is producing a certain amount of oil or gas, the lease continues to be in effect.

How is Held by Production Clause beneficial for a lessee?

HBP clause allows the lessee to hold on to the lease rights without any additional rental or delay fee as long as there is a minimal production of oil or gas from the leased area.

In a Held by Production Clause, what’s considered as Production?

Generally, Production refers to the extraction of oil and gas. However, the definition might vary across different leases and jurisdictions, sometimes including activities like drilling, discovery, or operations related to oil and gas extraction.

What happens if production stops briefly and then restarts?

The specifics of what happens when production ceases would depend on the wording in the lease contract. Some leases allow for a temporary cessation of production without terminating the lease.

Are there any possible drawbacks for a lessor with a Held by Production Clause?

Yes, in some cases, a lessee may maintain a lease with minimal production, preventing the lessor from renegotiating the lease or leasing to another party that might offer better terms.

Can the Held by Production Clause be negotiated?

Yes, the terms and conditions of an HBP clause, like any other clause in a lease, can be negotiated. It’s advisable for both parties to understand the implications and mutually agree on the terms.

How is the producing in paying quantities concept linked to the HBP clause?

Producing in paying quantities refers to the level of production that can cover operating expenses and yield a profit. If the production drops below this level, it may affect the validity of the lease under the Held By Production clause, depending on the lease terms.

Related Finance Terms

  • Mineral Rights
  • Royalty Payments
  • Lease Agreement
  • Drilling Operations
  • Oil and Gas Industry

Sources for More Information

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