The Shut-in Royalty Clause

Top  Previous  Next

The Shut-in Royalty Clause

         The typical  industry lease contains the following type of shut-in royalty clause:        

 If, at the expiration of the primary team or at any time or times thereafter, there is any well on said land or on lands with which said land or any portion thereof has been pooled, capable of producing gas or any other mineral covered hereby, and all such wells are shut-in, this lease may be continued in force as if no shut-in had occurred.  Lessee covenants and agrees to use reasonable diligence to produce, utilize, or market the minerals capable of being produced from said wells, but in the exercise of such diligence, lessee shall not be obligated to install or furnish facilities other than well facilities and ordinary lease facilities of flow lines, separator, and lease tank, and shall not be required to settle labor trouble or to market gas upon terms unacceptable to lessee.  If, at any time or times after the expiration of the primary term, all such wells are shut-in for a period of ninety consecutive days, and during such time there are no operations on said land then at or before the expiration of said ninety day period, lessee shall pay or tender, by check or draft of lessee, as royalty, a sum equal to one dollar ($1.00) for each acre of land then covered hereby.  Lessee shall make like payments or tenders at or before the end of each anniversary of the expiration of said ninety day period if upon such anniversary this lease is being continued in force solely by reason of the provisions of this sub-paragraph.  Each such payment or tender shall be made to the parties who at the time of payment would be entitled to receive the royalties which would be paid under this lease if the wells were producing, or may be deposited to such parties credit in the                       Bank at                                           , or its successors, which shall continue as the depositories, regardless of changes in the ownership of shut-in royalty.  If at any time that lessee pays or tenders shut-in royalty, two or more parties are, or claim to be, entitled to receive same, lessee may, in lieu of any other method of payment herein provided, pay or tender such shut-in royalty, in the manner above specified, either jointly to such parties or separately to each in accordance with their respective ownerships thereof, as lessee may elect.  Any payment hereunder may be made by check or draft of lessee deposited in the mail or delivered to the party entitled to receive payment or to a depository bank provided foro above on or before the last date for payment.

 

 From the mineral owner’s perspective, the shut-in royalty clause should give the oil company an  incentive to rush a gas well to production.  The oil company will want to build its gathering lines and any necessary treating facilities in an orderly fashion as allowed by its capital budget.  You or your client possibly could get impatient with the oil company’s “orderly fashion.”  A shut-in royalty clause with a large shut-in royalty that applies to wells shut-in both during and after the primary term provides a major incentive to the oil company to expedite commercial production from a gas well.

 Oil companies do not like shut-in royalty obligations.  Unless the tract size, timing, and location or favorable to you, do not expect to make much headway on changing the shut-in royalty provisions.  Furthermore, pushing too much for better shut-in concessions could break the deal.

 If you can get a shut-in royalty clause, ask for the highest shut-in royalty possible.  For example, an $1,000/per acre shut-in royalty for an 160 acre lease, would require the oil company to pay $160,000 a year for the privilege of going slow in bringing gas to market.  That amount would not break the oil company, but it is large enough to draw attention within the oil company to the delay in construction of infrastructure necessary to market the gas.   In the end, it would bring your or your clients royalty gas to market quicker.

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