Understanding “Held by Production” in Gas Leases: What it Means for Landowners in the Utica Shale Play

When it comes to gas leases, one term that frequently comes up is “held by production” (HBP). This concept is particularly relevant in areas like the Utica Shale play in Eastern Ohio, where gas exploration and extraction have significant economic and legal implications for landowners. But what does “held by production” really mean, and how does it impact landowners today?

What is “Held by Production”?

“Held by production” refers to a clause in gas leases that allows the lease to remain in effect as long as the leased land is producing oil or gas in paying quantities. Essentially, this means that the lease does not expire at the end of its primary term (often a set number of years) as long as production continues.

Historical Context

The concept of HBP has its roots in the early days of oil and gas exploration. Initially, leases were designed to encourage rapid drilling and production to ensure that resources were not left untapped. This was particularly important during the early 20th century when the demand for oil and gas was rapidly increasing.

In the context of the Utica Shale, which spans Belmont, Carroll, Guernsey, Harrison,  Jefferson, Monroe, Noble, and Tuscarawas Counties, the rush for shale gas has led to numerous leases being signed over the past decade. Many of these leases contain HBP clauses, which means that as long as gas is being extracted, the lease remains active.

Legal Implications

From a legal standpoint, leases that are HPB are crucial for both landowners and gas companies. For landowners, HBP leases mean that their land could be under lease for an extended period, potentially limiting their ability to renegotiate terms or lease to other companies. For gas companies, HBP provides a long-term guarantee that they can continue to extract gas without needing to renegotiate the lease.

How Does This Affect Landowners?

For landowners in Ohio, understanding the implications of HBP is essential. Here are a few key points to consider:

1. Long-Term Lease Commitments: Landowners should be aware that a lease that is HBP can extend their lease indefinitely, as long as production continues. This can limit their flexibility in renegotiating terms or seeking a new lease.
2. Financial Impact: While continuous production can mean steady royalty payments, landowners should also consider the long-term financial implications. It’s important to ensure that the royalty rates and terms agreed upon initially remain favorable over time.
3. Land Use and Development: An active lease under HBP can impact how landowners use their property. For instance, certain types of land development or alternative uses might be restricted by the terms of the lease.
4. Legal and Environmental Considerations: Continuous production can also bring ongoing legal and environmental considerations. Landowners should stay informed about any regulatory changes and potential environmental impacts associated with long-term gas extraction.

For landowners in the Utica Shale play, here are some practical tips to navigate the impacts of leases that are Held by Production:

1. Review Your Lease: Understand the specific terms and conditions of your lease, including if the lease is HBP and royalty percentages.
2. Seek Professional Advice: Consult with legal and industry experts to fully understand your rights and obligations under the lease.
3. Monitor Production: Keep track of production volumes and royalty payments to ensure they align with the terms of your lease.
4. Stay Informed: Stay updated on industry developments, market conditions, and regulatory changes that could affect your lease and property.

Conclusion

For landowners in the Utica Shale play, the concept of “held by production” is a double-edged sword. On one hand, it ensures continuous royalty payments as long as gas is being produced. On the other hand, it can limit landowners’ flexibility and control over their property. Understanding the historical and legal contexts of HBP can help landowners make informed decisions and navigate the complexities of gas leases in today’s shale gas industry.

If you’re a landowner with a gas lease or considering one, it’s crucial to consult with legal and industry experts to fully understand the implications of if a lease is held by production. This knowledge can help you protect your interests and make the most of your mineral rights. 

Landowners with questions about leases or interest in selling their mineral rights should call Gateway Royalty at 330-205-5038.