Shut-in Royalty

A shut-in royalty is a payment that keeps an oil and gas lease in force while a well that can produce is not producing. Whether a lease has such a right, what it costs, and how long it lasts come from the lease and from any statute that governs it.

Texas: state public school and Gulf land leases

Tex. Nat. Res. Code 52.024 requires these state leases to provide that if, after the primary term, "a well capable of producing oil or gas in paying quantities is located on the leased premises but oil or gas is not being produced for lack of suitable production facilities or lack of a suitable market, then the lessee may pay as a shut-in oil or gas royalty an amount equal to double the annual rental provided in the lease but not less than $1,200 a year for each well capable of producing oil or gas in paying quantities." If paid, "the lease shall be considered to be a producing lease," and the payment extends it for one year, with the right to extend "for four more successive periods of one year."

Utah: the SITLA lease form

The Utah SITLA oil and gas lease form extends the lease for a gas well that is producing in paying quantities but is "prevented from producing natural gas because of market conditions or lack of pipeline or other transportation method," when it is "the only producing well" on the lease or pooled lands. The lessee pays annual minimum royalties, and "no well may remain shut-in for longer than five (5) consecutive years."

Federal leases

The federal statute does not use the term shut-in royalty. It provides instead that no lease "covering lands on which there is a well capable of producing oil or gas in paying quantities shall expire because the lessee fails to produce the same unless the lessee is allowed a reasonable time, which shall be not less than sixty days after notice by registered or certified mail, within which to place such well in producing status" (30 U.S.C. 226(i); see also 43 CFR 3107.23). Minimum royalty may still be owed. The Office of Natural Resources Revenue glossary describes minimum royalty as due, among other cases, "for nonproducing leases that have a well capable of production in commercial quantities."

Why it matters in mineral title research

• A lease past its primary term with no production may still be alive by shut-in payment. Proof is the payment record, matched against the deadlines in the lease or statute.
• A late or misdirected shut-in payment may leave the lease expired, so the payee has to be the owner entitled to it on the payment date.
• The limits on how long a well can stay shut in differ by lessor, as the Texas and Utah examples show (see Held by Production).