Key Takeaways
- Lease extends indefinitely with paying production.
- One well can hold entire lease area.
- Production stoppage may terminate lease without protections.
- HBP clauses avoid renegotiation during secondary term.
What is Held by Production Clause?
A Held by Production (HBP) clause is a provision in oil and gas leases that allows the lessee to extend the lease beyond its primary term as long as the property produces hydrocarbons in paying quantities. This means the lease continues indefinitely while commercial production persists, securing the lessee’s operational rights without renegotiation.
The clause typically divides the lease into a fixed initial term and a secondary term triggered by production, ensuring continuous rights as long as the well generates net income after costs.
Key Characteristics
Understanding the main features of an HBP clause helps you grasp its impact on lease duration and operations.
- Extension Trigger: Production must be in "paying quantities," generating profit beyond operating expenses.
- Lease Duration: The lease extends indefinitely during production, surpassing the initial primary term.
- Scope of Holding: One producing well may hold the entire lease unless restricted by clauses like the Pugh clause.
- Legal Foundation: Rooted in traditional lease structures including the habendum clause.
- Impact on Tenements: The clause affects the size and rights of the tenement held under lease.
How It Works
The HBP clause automatically renews the lease into a secondary term once commercial production begins, avoiding the need for lease renegotiation and maintaining original terms such as royalty rates and access rights. Courts generally require the production to be marketable and profitable, not just capable of producing.
Production from a single well can hold the entire lease, depending on contract language and pooling arrangements. However, if production stops, the lease may terminate unless clauses like cessation of production, shut-in payments, or force majeure provide relief. Operators benefit by maintaining long-term access without additional upfront costs, as seen with companies like EOG and Devon Energy.
Examples and Use Cases
HBP clauses are widely used in the energy sector to secure leases in prolific and emerging plays.
- Major Energy Companies: Chevron often benefits from HBP clauses in large shale formations, maintaining leases through continuous production.
- Shale Plays: Operators in the Utica Shale leverage HBP clauses to hold extensive acreage with few wells, similar to strategies employed by Devon Energy.
- Lease Management: The presence of an HBP clause affects lease negotiations and portfolio management, influencing decisions on drilling and production schedules.
- Investor Perspective: Understanding HBP clauses is important when evaluating energy stocks, as they impact asset longevity and cash flow stability.
Important Considerations
While HBP clauses benefit lessees by guaranteeing long-term rights, they may limit landowners' flexibility to renegotiate or lease to other operators. You should carefully review the scope and limitations of these clauses, especially provisions related to cessation of production and pooling.
For investors, companies with extensive HBP holdings like EOG might have more predictable reserve life but also face challenges if production declines. Landowners and operators alike should understand the implications of HBP within the lease's broader legal framework, including how it interacts with easements and tenement rights.
Final Words
The Held-By-Production clause ensures leases remain active as long as production continues at profitable levels, locking in terms without renegotiation. Review your lease specifics carefully and consult a professional to assess how HBP provisions impact your rights and obligations.
Frequently Asked Questions
A Held by Production (HBP) clause is a provision that extends an energy company's lease rights beyond the initial term as long as the property produces a minimum paying quantity of hydrocarbons. This means the lease continues indefinitely during production without needing renegotiation.
Production in paying quantities triggers the secondary term of the lease, allowing the lessee to hold the lease indefinitely. Courts interpret this as producing enough hydrocarbons to cover operating costs and generate profit, not just the capability to produce.
Yes, typically one producing well can hold the entire lease or designated portions depending on lease language and pooling agreements. However, clauses like the Pugh clause may release non-producing acreage to the lessor.
If production ceases, the lease may terminate unless saved by clauses such as cessation of production grace periods, reworking clauses, shut-in payments, or force majeure provisions. Without these, the lease rights revert back to the landowner.
A Pugh clause limits the scope of the HBP clause by releasing non-producing acreage outside the producing well unit. This prevents a single well from indefinitely holding large portions of the lease that are not being developed.
Courts look for marketable volumes that generate net income after costs, indicating commercial production. Mere capability or small, uneconomic production does not qualify to hold the lease.
The HBP clause allows energy companies to avoid renegotiating leases and continue operations as long as production is profitable. This helps save costs and maintain rights to valuable land during fluctuating market conditions.
