Shut-in Royalty

A shut-in royalty is a payment made by a lessee to a lessor to maintain an oil and gas lease when a well on the lease is capable of producing but is not currently producing, typically due to a lack of pipeline connection, market, or other operational reason.

Purpose: - Maintains the lease in force when production is not occurring - Compensates the mineral owner during periods of non-production - Prevents the lease from terminating due to cessation of production

Typical provisions: - Lease must contain a shut-in royalty clause - A well capable of production must exist on the lease - Payment is made in lieu of actual production royalties - Amount is specified in the lease (often a fixed sum per acre per year)

When shut-in royalty applies: - Well is drilled and completed but no pipeline is available - Market conditions make production uneconomical - Well is awaiting connection to gathering system - Regulatory restrictions prevent production - Well is shut in for operational reasons

Limitations: - Not all leases contain shut-in royalty provisions - Some states limit the duration of shut-in status - Courts in some jurisdictions strictly construe shut-in clauses - Failure to timely pay shut-in royalties may terminate the lease

Distinction from delay rentals: - Delay rentals maintain a lease during the primary term before drilling - Shut-in royalties maintain a lease after a well is drilled but not producing - Both are payments in lieu of production