Shut-in Royalty Clause - It's Often Forgotten

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The Shut-in Royalty Clause is a provision that is often overlooked in oil & gas leases. With a few clicks and a few articles, a novice on oil and gas leases can quickly learn to ask for the striking of the warranty clause, the addition of a Pugh clause, and a higher bonus and royalty. Little is said of the shut-in royalty and clause, and it is seemingly forgotten in many negotiations. By contrast, it is one of the clauses most complained of years later and also a clause that frustrates many land and mineral owners when they learn of its implementation.

Purpose of the Shut-in Well

The general purpose of a shut-in seems harmless. A well is drilled and the corresponding infrastructure hasn’t kept pace with the drilling of the well. This is commonly associated with natural gas when actual construction of a pipeline lags or where the capacity of the existing lines are limited. With the investment in a well, an operator doesn’t want to see the lease lapse and lose their investment when the infrastructure might soon catch up.

Operators also want to assure they can hold a lease when there is intermittent downtime. Downtime could be a result of various improvements, testing, re-completions, new wells coming online in the vicinity, or a simple case of poor economics. What other purposes for a shut-in have you come across?

Abuse of the Shut-in Royalty Clause

While there are perfectly acceptable reasons to shut-in a well, there are other motivations and reasons to shut-in a well such as speculation or the prospect of flipping a lease to the next operator that are inapposite to the traditional notions of a shut-in. What reasons have you seen for exercise of the shut-in clause? Most initial lease offers prescribe a $1.00 per acre shut-in royalty allowing an operator to avoid paying additional bonuses, delay rentals, or royalties in exchange for a few hundred dollars a year depending on your acreage. Furthermore, while Colorado caselaw does provide that failure to timely pay a shut-in shall terminate a lease (Davis v. Cramer, 837 P.2d 218, 224 (Colo. Ct. App. 1992)), many operators have responded to eliminate this occurrence. Many lease offers today include a clause in the lease offer that “this lease shall not terminate because of failure to properly or timely make shut-in well payments,” which phrase effectively relieves an operator from much of any obligation to even pay the measly shut-in royalty.

Negotiating Shut-in Royalty Provisions

If you receive a lease offer, consider asking for the following:


1. A clause limiting the time to exercise the shut-in;
2. Higher shut-in royalty amount;
3. Deletion of clauses that excuse an operator’s obligation to timely or properly pay, or alternatively reaffirm that failure to timely pay shall cause a lease to terminate;
4. Limit the substances, situations or occurrences that can trigger a shut-in; and
5. Ask for the operator to provide notice of when a well is shut in or when production resumes.

If you've negotiated around this clause, please share your experience. What other revisions do you ask for on the shut-in clause?

Jenna H. Keller, Esq.

Attorney at Keller Law, LLC. (www.kellerlawllc.com)

Jenna H. Keller defends property rights and provides legal services to farmers, ranchers, rural property owners, and severed mineral interest owners in the areas of estate planning, natural resources (oil, gas, wind), real estate, and water.


The information in this article is for general information purposes only. This article should not be substituted for legal advice and should not be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or reading this article does not constitute, an attorney-client relationship. You are encouraged to contact an attorney for legal advice concerning the information provided in this article.

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Our family member has mineral rights holdings in Bent County, CO. The Land & Mineral Company-Texas, LLC representative, Tyson Delay has made an offer to lease mineral interests for oil/gas exploration. Richard Hawpe, another agent, has written of his interest on behalf of Land & Mineral Co. No contacts have been signed.

No recent contact has emerged for many weeks. Do you know any details of the status of these offers? Are they a substantial firm? Do you know these representatives?

They seem to not be available via telephone and have not communicate effectively.

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YOU ARE EXACTLY RIGHT why let some one store somthing of value for a very cheap rental price under your property / if they dont pump then charge for resovoir storage( shut in royalty ) and then they will pump you are intiteld to your royalty agrement / they need to pump.

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Shut in royalty- looking at a lease offer I have received, they are offering a $1 per acre shut in royalty per year. What do you suppose is a reasonable offer for increasing that royalty to?

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Mr. Pell, the drilling of a well and production of the minerals are considerations/moving forces in an oil and gas lease. The bonus for a paid up lease or delay rentals are to be paid to you to allow the operator to delay drilling the well. Shut in royalty is the agreed rental payment for the priviledge of not producing. To me, $25 quarterly per acre would be reasonable but most important would be that the shut in would not be for more than 2 years cumulative or the lease expires. I believe that this would be a reasonable incentive to the lessee/operator to produce. Your minerals and the lease of them do you little good if the operator can hold your lease for 30 years at a rate of $1 per acre per year, especially since you have leased the minerals, what was your appreciating asset has now become the lessee’s appreciating asset. It’s like owning gold, if the price goes up the lessee makes money. As the lessor you only have a royalty interest in the production so you only make money when there is production. Don’t let them sit on your minerals for decades for virtually nothing. Good luck.

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Thank you for that information. People on this forum are so helpful!!!

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If you make an election under the pooling what applies ?

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Looks like I have a similar lease proposal.. ie: $1 dollar per acre/year for shut in, and failure to pay shut in royalty does not terminate lease. I plan on countering both of those points (good advice below regarding a much higher quarterly shut in royalty and maximum cumulative shut in)

Curious about this part of the shut in paragraph?.. "or on other land with which land covered by this lease is pooled or unitized" Implying the lease shall not terminate even if a well on somebody elses lease is "shut in". Seems like a no brainer to get that piece removed?

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Regarding shut in clauses.

If I remember right, shut in only applies to gas, not oil.

In Oklahoma, OCC can over ride the terms of the shut in, so if your lease says 1 year for X amount of dollars and OCC changes the rules to Two years, you now have a 2 year shut in.

I may be wrong on this, but that is the best I remember.