Shut In Royalty Payments

Oklahoma Mineral Rights Owners,

Most oil and gas leases contain what is commonly known as a shut-in royalty clause.  The clause developed over the years to mitigate the harshness of the automatic termination rule.  Under the automatic termination rule, an oil and gas lease will generally terminate any time after expiration of the primary term unless there is a well on the leased premises producing gas “in paying quantities.”  This rule, in a majority of jurisdictions, requires actual production and marketing of natural gas.  Unlike oil, natural gas cannot be produced and then stored or transported in railroad cars or tank trucks – post-production facilities such as pipelines, compressors and dehydrators are generally required to process and deliver the gas to market.  In such circumstances where a gas well has been completed, but no market exists for the gas, the shut-in clause enables a lessee to keep the non-producing lease in force by the payment of the shut-in royalty.  Such payment serves as “constructive production” and avoids application of the automatic termination rule.

A standard shut in royalty is usually a nominal $1.00 per acre per year. If there are no additional provisions to address the shut in, then the operator can hold the lease if he continues to pay the shut in royalty. When negotiating the oil and gas lease, the lessor should ask for a provision such as the following:

"After the end of the primary term, this lease may not be maintained in force solely by reason of the shut in royalty payments, as provided heretofore, for any one shut in period of more than three (3) years, or from time to time, for shorter periods which exceed three (3) cumulative years."

Any questions regarding shut in royalty payments for the Oklahoma Oil and Gas lessor? More to follow.

BR