Shut-In Well Clause

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Shut-In Well Clauses

 

 The shut-in royalty clause normally addresses the situation where the lessee has completed a gas well and there is no market for the gas. See Griffin v. Crutcher-Tufts Corp., 500 So.2d 1008 (Ala. 1986. Some leases in use in Alabama have expanded the clause to apply also to oil wells that are shut-in. A typical shut-in royalty clause is as follows:

If, at any time or times after the expiration of the primary time, all such wells are shut-in for a period of ninety (90) consecutive days, and during such time there are no operations on said land, then at or before the expiration of said ninety (90) day period, lessee shall pay or tender, by check or draft of lessee, as royalty, a sum equal to the amount of annual delay rental provided for in this lease. Lessee shall make like payments or tenders at or before the end of each anniversary of the expiration of said ninety (90) day period if upon such anniversary this lease is being continued in force solely by reason of the provisions of this paragraph. . .

 

(Taken from Hederman Brothers—Jackson, Mississippi, Lease Form Producers 88 (9-70) With Pooling Provisions—Mississippi, Alabama, Florida.)

         Normally the shut-in clause does not apply unless the well is capable of producing oil and gas in paying qualities. Griffin v. Crutcher-Tufts Corp., 500 So.2d 1008 (Ala. 1986). Since shut-in clauses vary from lease to lease, attention to the particular clause is necessary to determine that clause's application to the facts before you. For instance, the shut-in well clause in the case of Federal Land Bank of New Orleans v. Terra Resources, Inc., 373 So.2d 314 (Ala. 1979) did not require the payment of shut-in royalties for a pooled unit, when the unit well was not located on the leased premises.

         In the case of Griffin v. Crutcher-Tufts Corp., a lessee attempted to maintain its lease through the payment of shut-in royalties.  It happens that the lessee sent a shut-in royalty check to the lessor during the final week of the primary term of the lease. At the time of the tender of the shut-in royalty payment, the well was incapable of commercial production. The shut-in royalty clause in the lease was as follows:

[W]hile there is a gas well on this lease or on acreage pooled therewith, but gas is not being sold or used, Lessee may pay as royalty at monthly intervals a sum equal to one-twelfth (1/12) of the amount of the annual rental payable in lieu of drilling operations during the primary term on the number of acres subject to this lease at the time such payments is [sic] made, and if such payment is made or tendered, it will be considered that gas is being produced from this lease in paying quantities.

 

Griffin v. Crutcher-Tufts Corp., 500 So.2d 1008, 1011 (Ala. 1986).

 The Alabama Supreme Court followed the abundant precedent of other oil and gas producing states and held that a tender of shut-in royalty payments for a well that is incapable of commer­cial production will not maintain a lease beyond its primary term.   Additionally, without citation of authority, the Alabama Supreme Court held that “the express terms of that clause [shut-in royalty clause] show that it applies only during the primary term of the lease.” Id.

Copyright 2011 by Edward G, Hawkins. All rights reserved.