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.
BREAKING DOWN Held By Production Clause
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.
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.