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Simple English definitions for legal terms
shut-in royalty clause
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A quick definition of shut-in royalty clause:
A shut-in royalty clause is a part of an agreement between a person who owns land and someone who wants to extract oil or gas from it. This clause allows the person who wants to extract oil or gas to keep the agreement in place even if they are not currently producing anything. Instead of paying the landowner for the oil or gas they extract, they pay a shut-in royalty fee to keep the agreement in place. This fee is paid in lieu of production.
A more thorough explanation:
Definition: A shut-in royalty clause is a provision in an oil-and-gas lease that allows the lessee to maintain the lease even when there is no production from the property because wells capable of production are shut in. In this case, the lessee pays the lessor a shut-in royalty in lieu of production.
Example: Let's say a company has leased a piece of land for oil and gas exploration. However, due to some technical issues, the wells on the property are shut in, and no production is possible. In this case, the company can still maintain the lease by paying the lessor a shut-in royalty. This royalty is usually a fixed amount per year and is paid to the lessor until the wells are reopened for production.
Another example: Suppose a company has leased a piece of land for oil and gas exploration, and the wells on the property are producing oil and gas. However, due to a drop in oil prices, the company decides to shut in the wells temporarily. In this case, the company can still maintain the lease by paying the lessor a shut-in royalty. This royalty is usually a percentage of the actual royalty paid to the lessor when the wells are producing oil and gas.
The above examples illustrate how a shut-in royalty clause works in an oil-and-gas lease. It allows the lessee to maintain the lease even when there is no production from the property, and the lessor receives compensation in the form of a shut-in royalty.