A recent lease offer stipulates these terms:
Paragraph 5. Where gas from a well producing gas is not sold or used, and no other products of gas from said well are being sold or use, Lessee may pay or tender, as royalty, at the end of each yearly period of this leased during which such gas or any products thereof are not sold or used, the sum of Fifty dollars ($50.00) per well, and while said royalty is so paid or tendered, it shall be considered that gas is being produced within the meaning of Paragraph 2 above.
Paragraph 2. It is agreed that this lease shall remain in full force and effect for a primary term of THREE (3) year from this date (herein called primary term), and as long thereafter as oil, gas or the products of oil or gas are produced from said leased premised, or drilling operations are continued as hereinafter provided.
It seems like fifty bucks can extend the lease forever unless the Lessor proves gas was never discovered, and if gas was found, was the reservoir worth recovering in the first place? Would an operator have any reason to keep a well in "limbo" in order to keep leases alive? The fifty dollar shut-in applies per well, a flat fee, and not based on net acreage. Now Paragraph 6 reads:
" If the Lessor owns a lesser interest in the above described land than the entire and undivided fee simple estate therein , then the royalties (including any shut-in gas royalty) herein provided for shall be paid the said Lessor only in the proportion which Lessor's interests bear to the whole and undivided fee."
The shut-in royalty now appears to be adjusted proportionally so I'm a bit addled! While I realize that it is often necessary for the operator to have a shut-in clause, I also sense it may be abused to extend leases without having to pay addition bonus fees. Why not ask for a higher shut-in royalty and limit the annual renewals?
Hope this makes sense, lease jargon is confusing and circuitous at best--Amy
Amy, you are absolutely correct. If your acres constitute 1/2 of the acres for the well, you receive $25. The fairness of such an amount as rental aside, there must be a limit to how long the lease can be perpetuated by a shut in clause. I think two years is reasonable and three years is a generaous amount of time to build a gathering line and find a market.
From the mineral owners point of view, the entire purpose of the lease was to get your minerals into production. The lease is for a certain number of years to give the lessee time to produce your minerals, but if he does not, the lease expires and you are free to give someone else a crack at it. A shut in clause that extends the lease forever without producing your minerals or paying you more than a pittance is directly opposed to the mineral owners best interest so there must be a cumulative time limit on how long the well can be shut in. I won't say the fee for the shut in is meaningless but compared to having your minerals tied up long term with no production, it pales in comparison. Certainly it pales compared to what you might lease the acres for to someone else.
From the lessee's point of view, they want to protect their investment at a cost of little to nothing and it is an investment, just like any other property, title and right to produce your minerals can increase in value and they don't have to produce them to make money. If there is no limit to the shut in clause, the lessee can drill a well prove the value of the title to the right to produce the minerals, wait a period of years and assign their interest in the minerals for a profit, they made money by not producing and the mineral owner did not.
As the lessor, you could consider the drilling of the well itself to be the greatest part of the consideration you receive for leasing. In another discussion Buddy Cotten mentioned a recent lease where a drilling commitment was required with liquidated damages if they didn't drill within a specified time. The drilling of the well has value to you as the lessor. If the lessee is allowed unlimited shut in privileges, they are taking back on the back side of the deal thousands of dollars worth of value per acre because the well has no value to you unless it produces. In fact the well has negative value if it does not produce and prevents you from marketing your minerals to someone who would produce and sell your minerals. I believe that it would be fair that the shut in royalty would be equal to the yearly rental paid to lease the mineral acres, ie if the rental payment to lease your minerals was $300 per acre for a 3 year term it would be $100 per acre shut in rental per year. If the lessee does not like it, all they have to do is produce and market your minerals which is what they claimed to want to do in the beginning, wasn't it?
Demand a limitation on the shut in. If they cannot find a market for it for five years, the lease should expire. In the meantime, I know a fellow who got $5 an acre for SH royalty, year 2 it was to go to $10, 3 $50, 4 $100 bucks and year 5 was $1000 ....the company signed the lease while squealing like a pig but they ain't shut it in either.
Thanks RW.
r w kennedy said:
Amy, you are absolutely correct. If your acres constitute 1/2 of the acres for the well, you receive $25. The fairness of such an amount as rental aside, there must be a limit to how long the lease can be perpetuated by a shut in clause. I think two years is reasonable and three years is a generaous amount of time to build a gathering line and find a market.
From the mineral owners point of view, the entire purpose of the lease was to get your minerals into production. The lease is for a certain number of years to give the lessee time to produce your minerals, but if he does not, the lease expires and you are free to give someone else a crack at it. A shut in clause that extends the lease forever without producing your minerals or paying you more than a pittance is directly opposed to the mineral owners best interest so there must be a cumulative time limit on how long the well can be shut in. I won't say the fee for the shut in is meaningless but compared to having your minerals tied up long term with no production, it pales in comparison. Certainly it pales compared to what you might lease the acres for to someone else.
From the lessee's point of view, they want to protect their investment at a cost of little to nothing and it is an investment, just like any other property, title and right to produce your minerals can increase in value and they don't have to produce them to make money. If there is no limit to the shut in clause, the lessee can drill a well prove the value of the title to the right to produce the minerals, wait a period of years and assign their interest in the minerals for a profit, they made money by not producing and the mineral owner did not.
As the lessor, you could consider the drilling of the well itself to be the greatest part of the consideration you receive for leasing. In another discussion Buddy Cotten mentioned a recent lease where a drilling commitment was required with liquidated damages if they didn't drill within a specified time. The drilling of the well has value to you as the lessor. If the lessee is allowed unlimited shut in privileges, they are taking back on the back side of the deal thousands of dollars worth of value per acre because the well has no value to you unless it produces. In fact the well has negative value if it does not produce and prevents you from marketing your minerals to someone who would produce and sell your minerals. I believe that it would be fair that the shut in royalty would be equal to the yearly rental paid to lease the mineral acres, ie if the rental payment to lease your minerals was $300 per acre for a 3 year term it would be $100 per acre shut in rental per year. If the lessee does not like it, all they have to do is produce and market your minerals which is what they claimed to want to do in the beginning, wasn't it?
I'll have to try that!
T L Shields said:
Demand a limitation on the shut in. If they cannot find a market for it for five years, the lease should expire. In the meantime, I know a fellow who got $5 an acre for SH royalty, year 2 it was to go to $10, 3 $50, 4 $100 bucks and year 5 was $1000 ....the company signed the lease while squealing like a pig but they ain't shut it in either.