Savings Clauses Generally:
A savings clause is any express lease provision that can be used to maintain the lease past its primary term in the absence of actual production on the lease premises. Where a dispute arises regarding the continuing validity of a lease, the plaintiff bears the burden of proof that the lease has not been maintained by production, and also that the various savings clauses in the lease did not maintain the lease.
There is no standard list of savings provisions and the parties are free to agree on any savings clauses they are capable of drafting. As a result, many leases contain multiple savings clauses that can either act independently or will need to be reconciled to determine their proper application. In addition, although one provision may lend support to a party’s position, the intention of the parties as expressed in the entire lease is the overarching principle of lease construction. Therefore, it is important to read each lease carefully to determine how it applies to the current situation.
Commencement of Operations Clause:
Many leases include a commencement of operations clause that maintains the lease past its primary term if the lessee has commenced drilling operations on the lease premises or oftentimes on lands pooled therewith. A common phrase in such clauses is that the lessee must be “then engaged in drilling operations.” The meaning of this phrase or its equivalent and the activities required to satisfy it have been the subject of much litigation and jurisprudence. In Texas, there appears to be no difference among concepts such as “operations for drilling,” “commence drilling operations,” “engaged in drilling operations,” and similar phrases. Thus, the presence or absence of the word “drilling” may be significant. In other jurisdictions, the precise words and phrases used may be given more significance.
Treating the various permutations of the clause the same, it does not appear that physical on-site boring into the ground is generally necessary to satisfy the clause, and preparatory activities such as building access roads to the drill site, moving tools and equipment onto the drill site, providing a water supply, and similar activities are usually sufficient if they are performed with the bona fide intention to proceed with diligence to the completion of the well.
It is clear that the lessee must commence operations in good faith, with a bona fide intention to continue the commenced operations with diligence toward their completion. Further, in order to perpetuate the lease, the operations must be commenced by the lessee himself or by a person with whom the lessee has entered into a relationship sufficient to consider the operations as counting for the lessee as well, such as a joint operating agreement.
Finally, many commencement of operations clauses include specific time and activity parameters that seek to clearly identify the kinds of preparatory activities that will qualify as “commencement” and establish time limits for completion of such operations after they are commenced. Some leases accomplish the same results with specific and limiting definitions of terms like “operations” or “drilling operations.”
Depending on the actions that have been taken and the party who has taken them, it is possible that a lease can be continued past its primary term without actual drilling.