Never Forget The Fundamentals Presented By: Paul Trimble

Habendum Clause (or Term Clause) 1. How long will the Oil and Gas Lease remain in effect? a. Period in which the Lessee has the right but not the obligation to drill. b. Period in which the Lessee may produce oil or gas.

2. Primary Term This lease shall remain in force for a period of ___ years from the date hereof... a. Fixed term – number of years. 3. Secondary Term... and so long thereafter as oil or gas, or either of them, is produced from said land by the lessee. a. What does produced or production mean?

1. Actual Production Rule – The actual (physical) extraction and marketing of oil or gas in paying quantities is necessary to maintain the Oil and Gas Lease in the secondary term. 2. Discovery Rule – The discovery of oil or gas in paying quantities is sufficient to maintain the Oil and Gas Lease in the secondary term.

3. Effect of express language in the Oil and Gas Lease. b. How much production is necessary? 1. Production must be in paying quantities (commercial quantities) to the Lessee. [Majority position – Oklahoma, Texas and others] a. produced in the Oil and Gas Lease = produced in paying quantities.

2. Two part test to determine production in paying quantities: a. First Test (Objective): Whether operating revenues exceed operating expenses over a reasonable period of time resulting in a profit to the Lessee. 1. Operating Revenues – The gross amount for all sales minus the gross production taxes and the Lessors royalty. a. No deduction for overriding royalty. [Majority position]

2. Operating Expenses (or Lifting Costs) – Excludes all lease acquisition, drilling, completing, equipping and other one-time capital expenses. Included expenses directly related to the lifting of the product such as: operating the pumps pumpers salaries, supervision, electricity, fuel, telephone service, well repairs, saltwater disposal trucking and transportation.

3. Reasonable period of time - usually one to three years. b. Second Test (Subjective): Whether the failure to produce in paying quantities is reasonable and justified in light of all circumstances 1. Accidents, maintenance and repair, or temporary loss of market for the product. 2. Reasonably prudent operator would expect to make a profit.

Drilling-Delay Rentals Clause 1. Delay Rental – A payment by the Lessee to the Lessor for the purpose of maintaining the Oil and Gas Lease for a period of time (usually one year) during the primary term of the Lease. Payment of the Delay Rental temporarily excuses the Lessees need to conduct drilling operations under the Lease.

What constitutes commencement of drilling operations? General Rule – A well has been commenced if (1) operations are conducted on the land (2) in good faith preparation for the drilling of a well for oil or gas and (3) the operations have been continued in good faith and with due diligence (4) with the intention of completing the well.

Continuous Drilling Clause (Savings Clause) If lessee shall commence to drill a well or commence reworking operations on an existing well within the primary term of this lease, or any extension thereof, or on acreage pooled therewith, the lessee shall have the right to drill such well to completion or complete reworking operations with reasonable diligence and dispatch, and if oil or gas, or either of them be found in paying quantities, the lease shall continue and be in force with like effect as if such well had been completed within the term of years first mentioned.

Shut-in Gas Well Royalty Clause (Savings Clause) During any period (whether before or after expiration of the Primary Term) when gas is not being sold, used, or taken in kind, and the well (or wells) capable of producing gas in paying quantities is shut in and there is no current production of oil on the leased premises sufficient to keep this lease in force, lessee may pay or tender to lessor a royalty of Two Dollars($2.00) per year per net mineral acre retained hereunder, such payment or tender to be made, on or before the anniversary date of this lease next ensuing after the expiration of ninety (90) days from the date such well is shut in and thereafter on the anniversary date of this lease during the period such well is shut in. When such payment or tender is made it will be considered that gas is being produced within the meaning of this lease.

Cessation of Production Clause (Savings Clause) 1. Doctrine of Temporary Cessation In the absence of a clause dealing with a temporary cessation of production [i.e., temporary cessation clause], lessee will have a reasonable time within which to restore production in paying quantities. Mechanical Difficulties Accidents Loss of Market

Cessation of Production Clause (Savings Clause) 2. If production from the above described land or acreage pooled therewith, ceases from any cause after the expiration of the primary term, this lease shall not terminate provided lessee succeeds in bringing back such production within 90 days from such cessation, or within such 90 day period commences drilling thereof with due diligence to completion, and if such production is restored through any such operations, this lease shall continue... If the well is capable of producing in paying quantities, clause will not result in termination of the Lease. [Majority position]

Miscellaneous & Administrative Clauses 1. Free Gas Clause Lessor shall have the privilege at his risk and expense of using gas from any well, producing gas only, on the leased premises for stoves and inside lights in the principal dwelling thereon out of any surplus gas not needed for operations hereunder.

Miscellaneous & Administrative Clauses 2. Removal of Fixtures and Equipment Lessee shall have the right to any time to remove all pipelines, tanks, equipment, facilities, or structures on the leased premises, including the right to draw and remove casing from any well. Upon expiration of the lease, lessee shall be required to remove all pipelines, tanks, equipment, facilities, or structures and any other debris on the leased premises within 90 days and plug all wells in accordance with the rules and regulations of the Oklahoma Corporation Commission.

Miscellaneous & Administrative Clauses 3. Assignment and Change of Ownership If the estate of either party hereto is assigned, and in the privilege of assigning in whole or in part is expressly allowed, the covenants hereof shall extend to their heirs, executors, administrators, successors or assigns. However, no change or division in ownership of the lands, rentals or royalties shall enlarge the obligations or diminish the rights of the lessee. No change in the ownership of the land or assignment or rentals shall be binding on the lessee until after the lessee has been furnished with a written transfer or assignment or a true copy thereof… In case lessee assigns this lease, in whole or in part, lessee shall be relieved of all obligations with respect to the assigned portion or portions arising subsequent to the date of assignment.

Miscellaneous & Administrative Clauses 4. Warranty Clause Lessor hereby warrants and agrees to defend the title to the lands herein described, and agrees that the lessee shall have the right at any time to redeem for lessor by payment any mortgages, taxes or other liens on the above described lands, in the event of default of payment by lessor, and to be subrogated to the rights of the holder thereof.