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“Shut-in” clauses are a source of confusion for many property owners who agree to an oil and gas leak.
On its surface, a shut-in clause probably doesn’t sound like a bad idea. It requires the oil and gas company to pay you a small royalty each month — even if the well isn’t currently operated or producing — in order to avoid forfeiting its lease. The royalty is a substitute for active profits from production.
In practice, it may backfire. Imagine this: You agree to a small signing bonus when you lease to the company based on the idea that the well they intend to drill will be a heavy producer. You expect to start receiving royalty checks soon — especially as the well nears completion.
Then the oil and gas market bottoms out. The company shuts the well down and stops production indefinitely. You begin receiving those small royalty checks each month, but they’re vastly less than what you thought you’d be making each month on an active well. You’d like to end the lease with the current company — but you can’t because you’re still receiving royalties.
Shut-in clauses can be a trap for the unwary. While they tend to be inserted in most oil and gas leases, they can be negotiated around. Landowners have the option of asking for significantly higher royalties than the oil and gas company initially may offer. They can also negotiate for a “must produce” timeline that will eventually force the company to either put the well in action or terminate the lease.
If you’re being approached about an oil or gas reserve on your property, don’t try to tackle the negotiations alone. An experienced attorney can help.
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