A “shut-in royalty” may sound like it is describing a member of high society that spends a little too much time at home. After all,” shut-in” is a term that is commonly used to describe people who are either voluntarily or unwillingly confined to a home, room, or even bed.
In the context of oil and gas, the term “shut-in” is used to describe wells, operations, and royalties relating to mineral rights production. Below, we will define the meaning of these terms and answer some of the most frequently asked questions surrounding shut-in wells for oil and gas production.
What does a shut-in well mean?
A “shut-in well” is a petroleum industry term meaning any gas and oil well that has been closed off for further production or has incidentally lowered its potential output. Shut-in oil wells come in two forms: those that have been shut down in an emergency and those that are designed to influence the supply of oil or another natural resource.
What causes shut-in wells within the oil and gas industry?
Most commonly, shutting in of oil and gas well is the result of unsafe or unusual conditions in the environment and economy. Namely, natural disasters are the leading cause for temporarily shutting in oil and gas operations.
In areas of the country where oil fields are found under large flat reserves of desolate land, there are a few different types of natural disasters that may cause oil wells to be shut-in.
Near the shores in Texas and Louisiana, shutting in and worker evacuation are often the hurricanes and other tropical storms. In Oklahoma and North Dakota, it is much more common for oil and gas operations to have emergency tornado protocols.
Lower Oil Demand
During the global coronavirus pandemic of 2020, stay-at-home orders caused the demand for petroleum to dramatically decrease overnight. With passenger cars, work vehicles, and truck fleets off of the road, the supply of oil began to stockpile in barrels and distribution centers across the country.
In response to this, many oil wells in high-producing states like Oklahoma and New Mexico began to shut-in wells to combat the oversupply of oil. Things like this tend to happen on a smaller scale throughout the normal operation of an oil well to combat fluctuations in local markets.
Everyone that has ever been involved with an oil production site knows just how many project delays one can expect in every unique situation. From machinery and labor failures to governmental and weather-related delays, projects rarely fall on the expected timeline set forth by investors.
Shut-ins from unexpected project delays can halt oil and gas production for hours, days, or weeks depending on the severity of the challenge.
Shut In Royalty
Although an oil or gas well shut-in may not affect most people in the United States, those that own mineral rights may be a bit keener to pay attention to mineral production in certain plants. If you own complete or partial mineral rights of an active plot of land, then your monthly oil and gas royalties may be instantaneously affected by any operations shutting in.
What is a Shut-in Royalty?
A “shut-in royalty” is a placeholder royalty payment to a mineral rights owner while the operations are temporarily shut-in. Essentially, what this means is that shut-in royalties assure oil and gas owners that they will still be paid during operation shutdowns caused by natural disasters, company delays, or government ordinances.
Shut-in Royalty Clauses
In an oil and gas mineral rights lease agreement, most quality contracts will include a shut-in royalty clause to guarantee some form of shut-in royalty. Most commonly, this is expressed as a real dollar value but may also come in an amount more closely related to recent extraction and sale operations.
Shut-in Royalty Provisions
Aside from the compensation amount, shut-in royalty provisions on an oil and gas lease should include a timeframe in which mineral rights owners can expect to be compensated. Depending on the conditions, shut-in royalty payments typically fall within a 90-day timeline.
How can I guarantee shut-in royalties?
Every oil and gas lease negotiation is different, and there is no standard contract throughout the fifty states of America. Before you agree to permit oil and gas drilling on your land, it is best to ensure that there is a shut-in royalty clause or provision directly stated on your oil and gas lease. Within the shut-in clause, payment and timeline considerations should be addressed.
To get the most guaranteed earnings out of your mineral rights lease, it is strongly recommended to work directly with a professional, specialized oil and gas intermediary.