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Duration of Gas and Oil Leases

Usually, oil and gas producing companies do not own the property on which they are drilling.  Companies lease gas and oil rights from the lessor.  An oil and gas lease is a contract.  A lessee under a lease of gas and oil has the right to have  reasonable access to leased property.  The purpose must be to explore, develop, and transport gas and oil.

Generally, a gas and oil lease runs for a definite term of years.  The lease has two distinct periods of duration.  A definite term and a subsequent term.   A definite term is for the exploration and the production of gas and oil, known as primary term.  The subsequent indefinite term provides a lease to continue as long as the production of oil or gas in paying quantities continues, known as thereafter term.  As long as the lessee pays the annual rent, the lease remains in effect.  This definite period of time is called the primary term.  When a company fails to start production, the lease expires after the primary term.  When the company starts drilling for oil and gas, the lease will remain in effect past the primary term.

An oil and gas lease containing a thereafter clause can be extended beyond the primary term by the drilling of a producing well within that term.

Drilling can be commenced under a habendum clause.  A Habendum Clause is a clause in a lease defining the type of interest and rights to be enjoyed by the grantee or lessee.  The habendum clause would specify the owner’s rights as well as how those rights are limited, when a lessor transfers a time share interest or an interest less than fee simple absolute.  It is a specific time frame or establishes certain prohibited activities.  A habendum clause sets out the terms for enforcing a contract, identifies the parties to the transaction and their interests in the conveyed real property.

Moreover, a mineral lease’s habendum clause defines the duration of the lease[i].  A typical habendum clause states that the lease lasts for a relatively short fixed term of years and then as long thereafter as oil, gas, or other mineral is produced[ii].

In some jurisdictions, a lease lasts as long as oil or gas is produced.  Automatic termination occurs when actual production permanently ceases during the secondary term[iii].

Although the habendum clause generally controls the mineral estate’s duration, other clauses can extend the habendum clause’s term.  Whethera lease terminates always involves resolving the intention of the parties from the entire instrument[iv].

A gas and oil lease automatically terminates:

  • When lessees fails to discover gas or oil within the primary term; or
  • When lessees fails to produce oil or gas within the particular period provided in the lease.

Additionally, failure to pay timely rent results in termination of lease.

However, parties cannot extend the period beyond the fixed term. Additionally, courts have no power to extend the period beyond the term fixed by the lease.  Estoppel, waiver, or laches cannot revive a terminated lease.

A sublease does not extend a gas and oil lease beyond the term of the lessee’s estate.  However, a lessor can authorize a further lease.

[i] Anadarko Petroleum Corp. v. Thompson, 94 S.W.3d 550, 554 (Tex. 2002).

[ii] Gulf Oil Corp. v. Reid, 337 S.W.2d 267, 269 (Tex. 1960).

[iii] Amoco Production Co. v. Braslau, 561 S.W.2d 805, 808 (Tex. 1978).

[iv] Gulf Oil Corp. v. Southland Royalty Co., 496 S.W.2d 547, 552 (Tex. 1973).

Inside Duration of Gas and Oil Leases