Legal Definitions - continuous-operations clause

A continuous-operations clause is a specific provision commonly found in oil and gas leases. This clause allows a lessee (the company or individual holding the lease) to maintain their rights to the leased property beyond the primary term of the lease, provided they are actively engaged in drilling operations or begin new drilling operations within a specified timeframe after the primary term ends. It is designed to prevent a lease from automatically terminating while valuable drilling work is underway or immediately after a well is completed, ensuring the lessee has a reasonable opportunity to complete ongoing projects or initiate new wells to establish or continue production.

Here are some examples illustrating how a continuous-operations clause might apply:

• Scenario 1: Completing an Ongoing Well

  Imagine "Summit Energy" holds an oil and gas lease with a primary term set to expire on December 31st. On December 1st, Summit Energy begins drilling a new exploration well. Without a continuous-operations clause, the lease might expire on December 31st, forcing them to abandon the partially drilled well and potentially lose their investment and the right to the minerals. However, if the lease includes a continuous-operations clause, it would allow Summit Energy to continue drilling that well past December 31st until it is completed, and if successful, bring it into production, thereby extending the lease.

• Scenario 2: Initiating a Subsequent Well After Completion

  "Prairie Drills Inc." has a lease with a primary term ending in June. In May, they successfully complete and bring into production their first well on the property. The continuous-operations clause in their lease specifies that if a well is completed within the primary term, the lessee has 90 days from the completion date to begin drilling another well to keep the entire lease in effect. This clause provides Prairie Drills Inc. with a crucial window to start a second well, even after the primary term has technically ended, without losing their rights to the rest of the leased acreage.

• Scenario 3: Resuming Operations After a Temporary Interruption

  Consider "Desert Sands Exploration," which has a lease where they completed a producing well just before the primary term expired. Shortly after the primary term ended, the well experienced a mechanical failure, causing production to cease. A continuous-operations clause might state that if production ceases for any reason, the lessee has 60 days to commence remedial operations or begin drilling a new well to restore production. This allows Desert Sands Exploration to repair the existing well or drill a replacement well within that timeframe, preventing the lease from terminating due to a temporary halt in operations.