Shut-in Royalty Clause - It's Often Forgotten

Jenna H. Keller · 2012-08-06T22:34:40Z

The Shut-in Royalty Clause is a provision that is often overlooked in oil and 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 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 is 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.*

Blogs

show post in topic

Home
Categories
Guidelines
Terms of Service
Privacy Policy

Powered by Discourse, best viewed with JavaScript enabled