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Wiley & Mathews

Oil wells are still producing, despite decline in demand

When you agreed to let the oil or gas company lease your land a few years ago, the demand for oil and other natural minerals was going strong. Now, there's been a huge drop in demand and production is falling accordingly. Will the well on your property suddenly stop production and your royalty checks dry up?

Maybe. It's true that there's currently an "oil glut," with barrels of the stuff piling up so much that the crude prices of U.S. oil even went negative for a bit. However, production hasn't stopped. In fact, it may take a while before the oil company manages to get the well on your field "shut in." The company may not actually be in any hurry to do so.

Why? It comes down to economics. As long as a well is producing something (and prices for oil stay above zero), it can cover some of the company's fixed costs.

It also comes down to physics. Once a well is shut in, it can be a difficult operation to start up again because the oil generally won't flow as freely if and when the well is reopened. It generally takes a lot of money and work to get the well to produce the same as it did before -- and there are no guarantees.

Plus, there's the possibility that the oil company can lose its lease. Many oil and gas leases have clauses that require the company to continue to operate the well or eventually surrender their rights to the lease entirely. That protects the landowner from having an inoperable well just sitting around, holding up space and profits.

Will the well on your property eventually shut down? It may depend on the terms of your lease and how forward-thinking the oil company may be. If you're unsure about your rights during this difficult time, have an experienced attorney review your lease with the oil company.

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