I was warned about a shut in gas clause, i need a short explanation what that means
A shut in gas clause means they do not have to produce your gas. The operator I think usually words them to be open ended that so long as they pay $1 per net acre per year, they can hold your minerals forever. I have been learning from professionals here that you can get more than $1 per net acre per year, also there can be provisions that they must produce, no matter what, within a specified time, possibly 1 year after the primary lease term expires or the minerals revert back to you. I hope you get alot of professionals to answer this because I’d like to learn even more myself.
i was told to ask the landman to remove this clause before signing, is that possible or are there other options to avoid problems later?
Dear Mr. Pritchett,
In oil and gas leases, after the primary term, operations or production are generally required to maintain a lease. Sometimes, after the primary term, gas wells have to wait on a market, like a pipeline connection. So, they are capable of being produced but for lack of a market. So sans a shut in royalty provision, the lease would terminate - after a producing well was drilled and the infrastructure was not in place to market the gas.
Therefore, in order to keep the lease from expiring, the lease contains a shut in royalty provision. This only applies to gas, not oil.
I cannot imagine a company removing this necessary clause from the lease form. What you can do, is limit the time the well is shut in without forfeitting the lease and increase the shut in royalty payments. All sophisticated landowner do just that. Even the less sophisticated landowners do just that.
first of all, thank you for responding, i have not seen a contract yet but am trying to be prepared. What type of limit should i ask for & how much in royalty payments…
There are several occasions when an oil & gas operator needs this provision. When a well goes down for a MAJOR mechanical reason the operator may need time to figure out how best to get the well back on production, ie., fix mechanical problem, open another interval in the wellbore, redrill the original wellbore, either as a horizontal or directionally drilled replacement well, etc. All these operations take time to setup & complete. The operator needs some way to protect their interest while they are working up the "fix"...A one year limit, paying SI royalties is reasonable.
While it's not called the "shut-in gas clause" many leases do allow for oil wells to be temporarily shut down for the same reasons.
Mr. Privett is correct. You can write an oil and gas lease form to say anything. And it seems like more and more oil companies are putting in clauses that would not pass muster with a landowner that possessed the slightest idea of what an oil and gas lease was. I think that they prey on the weak and uninformed.
In my response, I was referring to the more classical taught definition of shut in royalty provision. Tbe following is the shut in royalty provision extracted from the AAPL 675 Form, since it was the quickest for me to get my hands on:
"While there is a gas well on this Lease, or on acreage pooled therewith, but gas is not being sold or used Lessee shall pay or tender annually at the end of each yearly period during which such gas is not sold or used, as royalty, an amount equal to the delay rental provided for in paragraph 5 hereof, and while said royalty is so paid or tendered this Lease shall be held as a producing Lease under paragraph 2 hereof."
The concept of mechanical failure is (in the classic form) that you have a cessation of production clause that gives you XX days to commence operations in a good faith attempt to re-establish production in paying quantities, after the expiration of the primary term. During the primary term, you can "generally" resume the payment of rentals, or in the case of a paid up lease it does not matter. There are a million lease forms and I am giving a general response to a general question.
Many of those leases with unlimited SI royalty provisions exist, albeit they should be older ones. Not so much with unlimited terms anymore though. As mentioned previously, 1 year limit is reasonable. Don’t give them an unlimited SI royalty period. What are reasonable SI payments these days?
again thnx for the input. i have yet to see the oil lease & what clauses might be included, i was just forwarned about that one. I will question landman before negotiations are done… still waiting for response from anyone who may have an idea of terms in this area… bottineau cnty-ND-161n/81w sect. 26 & 27
As Mr. Cotten indicates, Shut-in clauses are a necessary part of a lease and economically helpful to all parties. However, since the shutting in of a well is a unilateral decision by the operator, the lessor must protect itself from an operator using this clause to arbitrarily inventory reserves. Protection from having reserves held in inventory to the lessors detriment can be documented in many ways and usually depending on the date of discovery of the gas field. One of my favorites for a known field with present pipeline access is to allow a reasonable number of consecutive days for shut-in then the payment of a significant advance royalty or the lease will be in default.
A prudent and honest operator can then evaluate the advance royalty as a "cost of holding inventory " and still pursue its business strategy while the lessor gets some economic benefit from its reserves. The shut-in time and advanced royalty payment must be set high enough in the lease to so that the cost of HOLDING MINERALS without production would be economically prohibitive in the area.
Gary L. Hutchinson
I just recieved a shut in clause that states: Notwithstanding anything to the contrary herein, this lease may be maintained by shut-in royalty payments for a period of only two (2) consecutive years at a rate of $5.00 an acre. Does this seem fair and reasonable? Thanks, John R.
to follow up on a prior post. The importance of a shut-in clause depends on what state your mineral interest/lease is in. Texas and most other states require marketing of production at the end of the primary term, or a contractual substitute (i.e, the shut-in clause). Oklahoma is in a minority of states and it only requires the capability of commercial production at the end of the primary term in order to extend the lease. Capability of commercial production means while the gas is not being marketed because of a lack of market, if it would make a profit of at least $1 over the cost of operations. Thus, this is why the failure to pay shut-in payments will not cause an oil and gas lease to lapse.
Thank you Gary. This helps John
Sorry, Tim ! Thank You. John
What happens in an undivided interest when lessor 1 signs a lease with a shut-in clause favorable to the lessor, and lessor 2 has a shut-in clause favoring the lessee?
For example, if lessor 1's lease says the lease will terminate after a one-year shut-in ... and lessor 2's lease has no lease termination shut-in provision ... what happens after a one-year shut-in?