Does the shut-in parent qualify for shut-in royalties? What if the opposite–child shut-in, parent producing?
Most of the time, as long as oil and gas are produced in paying quantities on a given leased premises, it does not matter whether the first or subsequent wells are drilled. The lease will be held by production.
However, lease terms can change this, so it depends upon the language in the lease.
If the lease has a Pugh clause that limits the acreage held by pooling to that portion of the leased premises actually in the pooled unit after the end of the primary term, and the pooled units for the wells cover different parts of the leased premises. Then, if the parent well is shut in but the child well is producing, only the area covered by the child well’s unit will be held by production. The operator will have to pay shut-in royalties to hold the parent well’s unit, unless there was other production on the unit. The same logic applies if the parent well is producing and the child well is shut in. In that case, the child well’s unit will need shut-in royalties or other unit production. The well drilling order is irrelevant.
Similarly, a lease may have a retained acreage provision that treats each area held by a well as a separate lease. In this case, if you have different areas being held by production for the parent and child wells, the parent or child ceases to produce, and it is past the primary term and continuous development period. Each well’s respective acreage will only be held by that well’s production, unless shut-in royalties are paid if the well is shut in.
Another possibility is continuous development. That could hold a lease for the continuous development period, which is defined in the lease. This means after one well is finished, even after the primary term has expired, as long as operations on another well commenced within the continuous development period, the leased premises will be held.
There may be other instances where variations on the general rule might happen, but it will depend on the particular lease terms and well facts.
The short answer is yes, usually, but it depends on the lease terms and the facts.
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