the five non-producing units upon expiration of the three-year primary term. The Defendants asserted that the lease remained in force and effect as to the five non-producing units due to continuous drilling operations. The Court explained that the general rule is that “an oil and gas lease is indivisible by its nature.” Id., at 61. However, a Pugh clause severs the oil and lease “from units where drilling operations or production are not occurring [, but] to make a lease divisible, the Pugh clause must be clear and explicit.” Id., at 61- 62. In Johnson, the Pugh clause provided: “Notwithstanding anything to the contrary, on expiration of the primary term of the lease, the lease shall terminate as to any part of the property not included within a well unit or units, as established by appropriate regulating authority, from which oil or gas is being produced in paying quantities and shall also terminate as to 100’ below geologic
strata or formations from which production has not occurred during the primary term.”
Id ., at 60-61. The Defendants argued that the continuous drilling operations provision saved the portions of the lease included within the five units that were not producing in paying quantities based upon the North Dakota Supreme Court’s decision in Egeland v. Cont’l Res., Inc., 616 N.W.2d 861 (N.D. 2000) (concluding that “because the Pugh clause was silent to the method of extension, no conflict existed regarding the Pugh clause’s interaction with the habendum and continuous drilling operations clauses of the lease”). The Court distinguished Egeland because the Pugh clause in Johnson specifically stated that “the lease will terminate at the expiration of the primary term for any part of the property not included within a well unit from which oil or gas is being produced in paying quantities.” The absence of any language in the Pugh clause to incorporate or reference the habendum or continuous drilling clause was fatal to Defendants argument that the lease was
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