Lease Extension “Savings” Clauses:
Dry Hole Provisions

If a lessee drills a well during the primary term of a mineral lease which is not successful in locating commercial quantities of oil or gas, the lessee’s rights under the lease may be temporarily extended without either the payment of delay rentals, or additional production activities, pursuant to Lease Extension “Savings” Clauses: Dry Hole Provisions.

Dry-Hole Provisions

Generally, a dry-hole provision will preserve a lessee’s rights during the primary term of a lease for a limited number of days (perhaps 90), if the lessee does not otherwise extend the lease term by:

• commencing a new well – thereby extending the lease term pursuant to a drilling operations clause,
  or
• paying a delay rental.

However, if the lease is characterized as a “paid-up” lease, a dry-hole provision will generally not be included in the lease because the delay rentals will have already been “paid in advance“.

Dry-hole provisions are somewhat hard to comprehend, because they contemplate both:

• the payment of delay rentals,
  and
• additional production activities.

In addition, the dry-hole provisions applicable to the final year of the primary term are generally different than the dry-hole provisions applicable to earlier years of the primary term.

Dry-hole provisions can be beneficial to both lessors and lessees by reducing the amount of uncertainty relating to the consequences of the lessee’s failure to produce oil or gas in commercial quantities during the primary term of the lease.

1981 Lease

An oil and gas lease used in Ward County, North Dakota in 1981 by an oil company in the business of oil exploration contained the following “dry hole provision“:

Should any well drilled on the land above described

• be a dry hole
  or
• cease to produce

and

• there are no other producing well or wells on the land
  or
• drilling operations are not being conducted thereon,

then and in that event if a well is not commenced before the next ensuing rental-paying date after the expiration of ninety (90) days from the date of such dry hole or cessation of production,

• this lease shall terminate as to both parties, unless the lessee,
  • on or before the rental paying date next ensuing after the expiration of ninety (90) days from the date of the completion of the dry hole or cessation of production,
  • shall resume the payment of rentals in the same amount and in the same manner as hereinbefore provided,

  and

• it is agreed upon resumption of the payment of rentals, as above provided,
  • the last preceding paragraph hereof,
  • governing the payment of rentals and the effect thereof,
• shall continue in force as though there had been no interruption in the rental payment.

If a dry hole should be drilled or if production ceases at any time subsequent to ninety (90) days prior to the beginning of the  last year of the primary term, no rental payment or operations are necessary in order to keep the lease in force during the remainder of the primary term.

Note that under the 1981 lease, a 90 day “grace period” was allowed to the lessee pursuant to the dry-hole provisions.

1977 Lease

For comparison purposes, an oil and gas lease actually used in Ward County, North Dakota in 1977 by an oil company in the business of oil exploration contained the following “dry hole provision“:

If at any time while there is a gas well or wells on the above land
(and for the purposes of this clause (c), the term “gas well” shall include wells capable of producing natural gas, condensate, distillate or any gaseous substance and wells classified as gas wells by any governmental authority)
such well or wells are shut in,
and if this lease is not continued in force by some other provisions hereof,
then it shall nevertheless continue in force for a period of ninety (90) days from the date such well or wells are shut in, and

• before the expiration of any such ninety (90) days period,
• lessee or any assignee hereunder may pay or tender an advance annual royalty equal to the amount of delay rentals provided for in this lease for the acreage then held under this lease by the party seeking such payment or tender,

and if such payment or tender is made,

• this lease shall continue in force
  and
• it shall be considered that gas is being produced from the leased premises in paying quantities within the meaning of paragraph 2 hereof for one (1) year from the date such well or wells are shut in,
  and
• in like manner subsequent advance annual royalty payments may be made or tendered and this lease shall continue in force and it will be considered that gas is being produced from the leased premises is paying quantities within the meaning of said paragraph 2 during any annual period for which such royalty is so paid or tendered;

such advance royalty may be paid or tendered in the same manner as provided herein for the payment or tender of delay rentals; royalty accruing to the owners thereof on any production from the leased premises during any annual period for which advance royalty is paid may be credited against such advance payment.

Note that under the 1977 lease, a 90 day “grace period” was also allowed to the lessee pursuant to the dry-hole provisions.

Comparison of Lease Terms

The terms of the dry hole provisions used in both the 1981 and 1977 leases were substantially similar.

Topics of Interest – North Dakota Ancillary Probate

Topics of Interest – North Dakota Mineral Rights.

Topics of Interest – North Dakota Transfer on Death Deeds

Topics of Interest – North Dakota Affidavits of Heirship

Topics of Interest – North Dakota Intestate Succession.

Topics of Interest – North Dakota Informal Probate

Topics of Interest – North Dakota Intestate Succession.

Gary C. Dahle has represented clients from the countries of Canada, Norway, and Sweden, and the states of Alabama, Arizona, California, Colorado, Connecticut, Florida, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Tennessee, Texas, Virginia, Washington, and Wisconsin in the United States, with respect to North Dakota mineral rights and probate issues in various North Dakota Counties.

http://www.legis.nd.gov/general-information/north-dakota-century-code