Amendment to Oil and Gas Lease to Add Shut-In Provision For Oil Wells
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FAQ
An oil well is not like a light switch you can flick on and off. A well that has been shut down can be hard to turn back on. Elizabeth Gerbel, CEO of EAG Services, an oil and gas consulting company, compares it to a bottle of soda.
In the petroleum industry, shutting-in is the implementation of a production cap set lower than the available output of a specific site. This may be part of an attempt to constrict the oil supply or a necessary precaution when crews are evacuated ahead of a natural disaster.
Definition: Shut-in royalty is a payment made by an oil and gas lessee to the lessor in order to keep a lease in force when a well capable of producing is not utilized. This is usually because there is no market for oil or gas or no pipeline ready to receive production.
The cost of a routine abandonment of a typical well in the United States is about $5,000 (~Texas average cost in year 2000). If a well has developed a leak that allows gas to flow up the outside of the well casing, finding and correcting the leak can push the cost of abandonment beyond $100,000.
Essentially, the shut-in royalty provision allows a lessee to temporarily cease production (i.e., shut-in a well) and pay a shut-in royalty to the lessor in place of the royalty on production that is not occurring during the shut-in period.
To shut in a well means to make it not produce, so we'll start with a primer on production. When a well is producing it means the well has been drilled, completed in a reservoir, and oil and/or gas is somehow moving up the wellbore and to the surface facility.
To restart production, it is necessary to bring a new rig, drill the cement plug, and pump the sludge blocking the well head.At best, resuming production may require months of work, at worst, shutdown can permanently diminish the throughput of the facility. Offshore drilling platforms have their own challenges.
The ability to declare a well shut-in and simply tender a shut-in royalty in lieu of a production royalty does not occur automatically. There is no inherent right to shut-in a completed oil/gas well.
The temporary shutting in of wells is the one thing that oil companies are trying to avoid at all costs. That's because restarting production is expensive and wells are not guaranteed to return to their flow rate.