What is Held By Production Clause?
297 reads · Last updated: December 5, 2024
"Held by production" is a provision in an oil or natural gas property lease that allows the lessee, generally an energy company, to continue drilling activities on the property as long as it is economically producing a minimum amount of oil or gas. The held-by-production provision thereby extends the lessee's right to operate the property beyond the initial lease term. This provision is also a feature of mineral property leases.
Definition
The Held by Production (HBP) clause is a provision in oil or gas property lease agreements that allows the lessee (usually an energy company) to continue drilling activities on the property as long as it produces a minimum economic amount of oil or gas. This clause extends the lessee's right to operate the property beyond the initial lease term.
Origin
The HBP clause originated in the early 20th century in the United States, during a period of rapid growth in the oil and gas industry. It was introduced in lease agreements to encourage the development of mineral resources, ensuring that lessees could continue resource development after the lease term expired, provided they maintained a minimum economic output.
Categories and Features
HBP clauses typically fall into two categories: production-based clauses, which require the lessee to maintain a certain level of production, and time-based clauses, which require reaching a certain production level within a specific timeframe. The features of HBP clauses include high flexibility, allowing adaptation to different market conditions and resource situations. The advantage is the extension of the lease term, while the disadvantage may include the risk of over-exploitation of resources.
Case Studies
A typical case is ExxonMobil's oil field leases in Texas. Through the HBP clause, ExxonMobil was able to continue exploiting the oil fields after the initial lease term, as long as they maintained the minimum production level. Another case is Chevron's gas fields in California, where similar clauses allowed Chevron to continue drilling activities after the lease term, ensuring long-term resource development.
Common Issues
Common issues investors face when applying the HBP clause include determining the minimum economic production level and dealing with the impact of market price fluctuations. A common misconception is that the HBP clause allows for indefinite extension of the lease term; in reality, the continuation of the clause depends on maintaining the minimum economic output.
