Legal Definitions - operations clause

An operations clause is a specific provision commonly found in oil-and-gas lease agreements. Its primary purpose is to ensure that the lease remains active and does not terminate as long as the lessee (the company or individual holding the lease) is continuously engaged in significant activities related to the exploration, drilling, development, or production of oil and gas on the leased property.

This clause is crucial for lessees because oil and gas operations often involve substantial time and investment. It allows them to maintain their rights to the land for resource extraction beyond an initial fixed term (known as the "primary term"), provided they are actively pursuing the development of the oil and gas resources. Essentially, if the "operations" are ongoing, the lease stays in effect.

• Example 1: Drilling a New Exploratory Well

  Imagine a company, "Frontier Energy," holds an oil and gas lease on a large ranch. The lease has a primary term of five years. In the fourth year, Frontier Energy begins drilling a new, deep exploratory well, hoping to discover a new oil reservoir. The drilling process is complex and extends beyond the five-year primary term.

  How it illustrates the term: Even though the initial five-year period has passed, the operations clause in Frontier Energy's lease would prevent it from expiring. As long as Frontier Energy is actively and continuously engaged in the drilling and development of this new well, their rights to the land under the lease remain valid, allowing them to complete the well and potentially begin production.

• Example 2: Major Well Rework or Repair

  Consider "PetroFlow Inc.," which has been producing natural gas from a property for many years under a lease where the primary term has long expired. One of their key producing wells experiences a severe mechanical failure, causing production to cease. To restore the well's output, PetroFlow Inc. initiates an extensive "workover" operation, which involves significant equipment, personnel, and several months of intensive repair and re-completion efforts.

  How it illustrates the term: This substantial workover, even though it's on an existing well, qualifies as an "operation" under the clause. If the lease's terms dictated it would expire due to a cessation of production, the operations clause would keep the lease in effect because PetroFlow Inc. is actively working to restore and continue the development and production of natural gas from the property.

• Example 3: Constructing Essential Infrastructure

  A company called "GasConnect LLC" has successfully drilled several productive gas wells on a leased property. The primary term of their lease is nearing its end, but to efficiently transport the gas to market, GasConnect LLC needs to construct a new, larger gas gathering pipeline system and a compressor station directly on the leased land. This construction project is substantial and will take several months to complete.

  How it illustrates the term: The construction of essential infrastructure, such as pipelines and compressor stations, that is directly tied to the extraction, processing, and transportation of oil and gas from the leased property, can be considered an "operation" under the clause. This activity would keep the lease active beyond its primary term, allowing GasConnect LLC to complete the necessary facilities to bring the discovered resources to market without losing their lease rights.