In the oil and gas industry, a Pugh Clause allows lessors to relinquish ownership of land not undergoing production activities at the end of the primary lease term or at the end of continuous drilling operations. It derives its name from Lawrence Pugh, a Louisiana lawyer who first drafted the clause in 1947 in response to the Louisiana Supreme Court’s decision in Hunter v. Shell Oil Co., which held that production from a leased unit will maintain the lease in force for all leased land, even for regions that are not contiguous or producing oil, gas, or minerals.
Also known as a freestone rider, a Pugh Clause allows lessors to avoid maintaining ownership of a lease’s full acreage while only producing on a small portion of the land. In such a situation, a lessor would receive no production revenue or royalties from undeveloped land, but would still maintain indefinite ownership of the undeveloped acreage under the original lease terms. A Pugh Clause prevents this anomaly by allowing for the termination of ownership of land that is not producing oil, gas, or minerals and is not otherwise maintained by the lease. Additionally, it exists in two variations. A vertical Pugh Clause releases all land below a specified depth or particular producing zone, while a horizontal Pugh Clause facilitates the release of lands lying outside of a producing unit, at both the surface and all depths.