Term for Shut-in Royalties

We have been approached by a producer to lease property we have in Caddo County, OK. It has a shut-in royalty provision without a maximum term. Is this the current convention, or do most agreements have a maximum term for shut-in royalties?

Thank you.

Most operators will try for an open end. I limit for two years cumulative (not “consecutive” which is the word the operators prefer.)

The most important clause you need to be concerned about is the post production charges wording as that will cost you the most money if you don’t get it fixed.

Unless OK is different than Texas I’d suggest limiting shut-in royalties to only gas wells, not those classified as oil wells, and check what they propose paying per acre for the shut-in. Some leases still show very low amounts, like $10 - $50/acre.

Thank you very much, Martha. The agreement is silent as to post production charges. Do you propose a cap or removing certain categories of costs?

Phil

Thanks, Dusty. They are offering only $1 per acre!! Thanks for suggesting limiting the shut-in-royalties to only the gas wells. Great suggestion.

Phil

It depends upon the state. OK is an implied covenant to market state, so they are supposed to get your product to market without charging you. If you let them put the post production charges in your lease, then they can charge you. I have a clause in my OK Exhibit A that totally negates any attempts to charge me PPC. Other states have different laws and generally do charge post production charges but you can hopefully get a higher royalty to offset them.

Just curious why you would limit to shut-in royalties for only gas wells? I would want to be paid shut in royalties for oil as well, especially right now when they are shutting in oil wells.

In line with what Martha asks, in Oklahoma, if the ogl doesn’t specify shut-in royalty for oil, that doesn’t mean a company can’t shut the well in for lack of an oil market, it just means no royalty is payable.

The idea is that because the production can be trucked oil wells should never need to be shut in for the reasons gas wells often are, lack of pipeline capacity. On oil wells I would rather be in a position where I had the ability to require appropriate payment or renegotiation of the lease instead of being force to accept a shut-in through the operator’s payment of a small per acre amount.

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Tim, like I said earlier if the laws are different in Oklahoma that might not be logical. But in Texas there’s a lot of discussion right now on whether market factors/price or Covid-19 allows operators to suspend production of oil wells. Like anything else in a lease it might require going to court to prove it, but I’d rather start with a special provision that modifies the standard wording and spells out shut-in royalty payments won’t hold oil wells.

Thanks again, Martha. Much appreciated. Phil