CMA CMA Lease & Contract Analysis 1 — Questions and Answers
Question 1: Which lease clause allows a lessee to maintain the lease beyond the primary term if production is occurring in paying quantities?
- Habendum clause (Correct answer)
- Granting clause
- Royalty clause
- Mother Hubbard clause
Correct answer: Habendum clause
The habendum clause defines the lease's duration, including the condition that production in paying quantities extends the lease beyond the primary term.
Question 2: A minerals appraiser reviewing a lease finds it contains a 'Pugh clause.' What does this clause primarily accomplish?
- It limits production to specific formations
- It releases acreage not held by production from the lease (Correct answer)
- It grants the lessee surface access rights
- It establishes the royalty payment schedule
Correct answer: It releases acreage not held by production from the lease
A Pugh clause releases non-producing acreage or formations from the lease at the end of the primary term, preventing a single well from holding an entire large tract.
Question 3: What is the standard minimum royalty rate in a US oil and gas lease on private lands?
- 1/8 (12.5%) (Correct answer)
- 1/4 (25%)
- 1/16 (6.25%)
- 3/16 (18.75%)
Correct answer: 1/8 (12.5%)
The traditional minimum royalty on private US mineral leases is 1/8 (12.5%), though modern leases often negotiate higher rates.
Question 4: In a mineral lease, which clause typically grants the lessee the right to use surface resources such as water for operations?
- Surface use clause
- Granting clause (Correct answer)
- Accommodation doctrine
- Force majeure clause
Correct answer: Granting clause
The granting clause defines what rights are conveyed to the lessee, and in many leases this includes ancillary surface rights needed for operations.
Question 5: What does a 'shut-in royalty' provision in a mineral lease allow?
- The lessor to terminate the lease for non-payment
- The lessee to hold the lease by paying a nominal royalty when a gas well cannot market its production (Correct answer)
- The lessee to deduct post-production costs from royalties
- The lessee to suspend operations during low commodity prices
Correct answer: The lessee to hold the lease by paying a nominal royalty when a gas well cannot market its production
A shut-in royalty clause allows a lessee to maintain a lease by paying a small nominal royalty when a completed gas well has no market for its production.
Question 6: Which type of lease clause determines how royalties are calculated—at the wellhead versus at a downstream point?
- Royalty clause (Correct answer)
- Market value clause
- Post-production cost clause
- Net back clause
Correct answer: Royalty clause
The royalty clause specifies the royalty rate and methodology for calculation, which directly determines whether post-production costs are deducted.
CMA CMA Lease & Contract Analysis 1
Which lease clause allows a lessee to maintain the lease beyond the primary term if production is occurring in paying quantities?