Shut-In Royalty Understanding

Oil and Gas Leasing Help
1

Hello. I'm new to the world of minerals, gas, and oil. I have read some of the prior postings, but I suppose these all affect one respectively. I've recently received a gas lease offer in Pennsylvania. Small plot of land, less than 10 acres. Active horizontal drilling and pad building in the area. Here is my shut-in royalty clause... In layman's terms, is it negotiable and is it worth it for the little acreage at hand? Thanks.

  • "Shut-in Royalty. If after the primary term one or more wells on the leased premises, or lands pooled or unitized therewith are capable of producing Oil and Gas Substances in paying quantities, but such well or wells are either shut in or production therefrom is not being sold by Lessee, such well or wells shall nevertheless be deemed to be producing in paying quantities for the purpose of maintaining this lease. If for a period of 90 consecutive days such well or wells are shut in or production therefrom is not sold by Lessee, then Lessee shall pay an aggregate shut-in royalty of five ($5.00) dollars per acre then covered by this lease. The payment shall be made to Lessor on or before the first anniversary date of the lease following the end of the 90‑day period and thereafter on or before each anniversary while the well or wells are shut in or production therefrom is not being sold by Lessee; provided that if this lease is otherwise being maintained by operations under this lease, or if production is being sold by Lessee from another well or wells on the leased premises or lands pooled or unitized therewith, no shut-in royalty shall be due until the first anniversary date of the lease following the end of the 90‑day period next following the cessation of such operations or production, as the case may be. Lessee’s failure to properly pay shut-in royalty shall render Lessee liable for the amount due, but shall not operate to terminate this lease. Shut-in royalty payments for a shut-in well may be paid for a consecutive period not to exceed three (3) years for a single shut-in period. In addition, Shut-in royalty payments for a shut-in well may not be paid for a cumulative period of six (6) years over the life of the well."
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I have a similar topic. can someone explain what this shut-in means? thanks

3

A shut-in well is a well where the operator/lessee doesn't have a market to sell the gas. In an oil well, the oil goes into a tank, and when the tank gets sufficiently full, the company calls the oil purchaser and he comes out and picks up the oil and, essentially, pays the operator for the oil.

Natural gas is a different type of substance. It requires a pipeline to get transported. sometimes, the purchaser cant get the pressure right on the producing well versus the pipeline. Sometimes, there is too much gas already in the system.

A shut-in well is a well which has been completed and has the capability of selling gas, but there is no pipeline in place, or the purchaser can't buy the gas. In that situation, the lessee is obligated to pay the mineral owner the fee that is designated in the lease, which is typically $1 per year per net acre that the royalty owner owned.

Now, is it negotiable? sometimes. Some lessees ask for more money or want a limit on how many years a well can be shut in.

4

Unless you are in an area with few pipelines, three years at a time and six years is too long for cumulative shut-in. The operator is simply holding the lease rather than paying an extension bonus or improving your terms. Try for 2 years total both at one time and cumulative,