A shut-in royalty is a payment made by an oil and gas lessee to the lessor to maintain the lease when a well is capable of producing oil or gas but is not currently in use due to a lack of market availability. This payment helps to keep the lease active, preventing termination at the end of the primary term, unless actual production has begun.
This term is primarily used in the context of oil and gas law. It is relevant in lease agreements between lessors (landowners) and lessees (oil and gas companies). Understanding shut-in royalties is crucial for parties involved in energy production, as it affects lease maintenance and financial obligations. Users can manage related documents and agreements through legal templates available on platforms like US Legal Forms.
Here are a couple of examples of abatement:
Example 1: An oil company has drilled a well that can produce oil, but due to market conditions, they are unable to sell the oil. To avoid losing the lease, they make a shut-in royalty payment to the landowner.
Example 2: A gas well is ready to produce, but pipeline issues prevent it from entering the market. The lessee pays shut-in royalties to keep the lease in force until production can start. (hypothetical example)
| State | Shut-In Royalty Regulations |
|---|---|
| Texas | Shut-in royalties are common and often specified in lease agreements. |
| Oklahoma | Regulations may vary, and lessees must adhere to specific state laws regarding payments. |
| Louisiana | Shut-in royalties are recognized, but terms depend on individual lease agreements. |
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
| Term | Definition | Key Differences |
|---|---|---|
| Shut-In Royalty | Payment to maintain a lease when a well is not producing. | Specific to oil and gas leases. |
| Production Royalty | Payment based on actual production of oil or gas. | Paid only when production occurs. |
If you are a lessor or lessee dealing with a shut-in royalty situation, consider the following steps:
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