The shut-in royalty clause is a provision in a contract between a landowner and an oil or gas extractor. It permits the extractor to maintain the contract even if they are not actively extracting resources. Instead of compensating the landowner for the extracted resources, the extractor pays a shut-in royalty fee to uphold the agreement. This fee serves as an alternative to production-based payments.
A shut-in royalty clause is a provision in an oil-and-gas lease that enables the lessee to keep the lease active even when the property’s wells are not producing due to being shut in. Instead of production, the lessee pays the lessor a shut-in royalty. For instance, if a company has leased a piece of land for oil and gas exploration but encounters technical issues causing the wells to be shut in, the company can still maintain the lease by paying the lessor a fixed shut-in royalty annually until the wells are reopened. Similarly, if the wells are producing but the company decides to temporarily shut them in due to low oil prices, the company can still keep the lease by paying the lessor a shut-in royalty, usually a percentage of the regular royalty paid when the wells are producing. These examples demonstrate how a shut-in royalty clause functions in an oil-and-gas lease, allowing the lessee to retain the lease even without production while compensating the lessor through a shut-in royalty.
A Shut-In Royalty Clause is a provision in an oil and gas lease that allows the lessee to pay a reduced royalty rate to the lessor if production is shut-in due to certain circumstances.
Typically, a Shut-In Royalty Clause is triggered when production is shut-in due to lack of market demand, lack of pipeline capacity, or other factors beyond the lessee’s control.
The reduced royalty rate is typically a fraction of the original royalty rate, often around 1/8th or 1/16th of the original rate.
The length of time that a Shut-In Royalty Clause can be in effect varies depending on the specific language of the lease agreement. Some clauses may have a specific time limit, while others may be in effect until production resumes.
Yes, a Shut-In Royalty Clause can be renegotiated if both parties agree to new terms.
Yes, a Shut-In Royalty Clause can be waived if both parties agree to do so.
If the lessee fails to pay the reduced royalty rate, the lessor may have the right to terminate the lease agreement.
No, a Shut-In Royalty Clause cannot be included in a lease agreement retroactively. It must be included in the original lease agreement.
Yes, a Shut-In Royalty Clause can be included in a lease agreement for renewable energy resources, such as wind or solar power.
Yes, it is recommended to consult with an attorney before including a Shut-In Royalty Clause in a lease agreement to ensure that the language is clear and enforceable.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 16th April 2024.
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