Now, I know you are all reading this because you said “of course everyone who isn’t a moron knows what a pugh clause is.” However, after an interesting discussion on LinkedIn (see here) several months back I began specifically asking my clients how they defined a vertical and horizontal pugh clause. I got more than one answer, and it opened my eyes to a way that one could easily make mistakes for their client.
Why? Because the ‘old’ way most companies (and many still do) defined a vertical pugh is as a depth severance after the primary term. Likewise, they define a horizontal pugh as a severance of acreage outside of developed acreage after the primary term.
Over the last few years that definition has been changing. Curt Horne, CPL was nice enough to include a blurb from the AAPL Introduction to Field Land Practices Seminar:
Horizontal Severance – a conveyance of all, or some portion, of the minerals above, below, or between specified depths, or in a given stratum or horizon.
What does that mean? That a horizontal severance severs the minerals along a ‘horizon’, or via depth. Alternately, a vertical pugh severs minerals by acreage. Think of a horizontal pugh as cutting your lease ‘horizontally’ at the lowest producing depth (for example), and a vertical pugh as cutting your lease vertically along your unit lines (again, for example). I think it would be fitting to to include another portion of the conversation on LinkedIn from Cathaleen Pettigrew of Pettigrew & Pettigrew Land Services, which succinctly explains the concept:
Many land professionals are confused about what is a vertical and what is a horizonal pugh clause. LEGALLY – a vertical pugh clause is one where all acreage outside of the well/unit boundaries must be released. LEGALLY – a horizonal pugh clause is one where you must release acreage below a certain depth. However, these two terms are used interchangeably in the industry. The way I teach my studends is this, if you warp your arms around the unit and chop down (vertically) then it is a vertical pugh clause. If you go down the drill hole and chop across (horizontally) then that is a horizontal pugh clause. Silly, but it helps you to remember and get it right. Don’t fret though even alot of attorneys have a misunderstanding of this one.
This is not the way many of us have been taught, and this is not the way that operators consider pugh clauses to be defined. Which can lead to some confrontations if you start telling your client they don’t know what a vertical pugh is. The solution I’ve come up with is whenever the ‘definition’ of a vertical or horizontal pugh might matter, for instance when you are entering their lease data into their land system — I now always ask what they call a horizontal and vertical pugh. Then I typically suggest changing their provision coding data to read “Horizontal Pugh (Depth)” and “Vertical Pugh (Acreage)”. If their definition is the opposite of that, then I suggest changing it to read “Vertical Pugh (Depth)”, etc. In my opinion, this is the best way to handle the issue.
If you’d like to read more about Pugh clauses and other special provisions I’d recommend you check out Landman Lease and Title Manual (Volume 1) by John R Childrens and Joe W Judd. It’s a great primer.
Let us know in the comments below if you have any other ideas for handling this sticky issue!