Today Justin and I talk about reasons that operators may shut-in producing wells, including when they do this to prevent issues like frac interference which we explain what this is and why this is a concern. In this episode, we also talk about some of the things to know about the shut-in royalty clause in most oil and gas leases.
We recorded this episode in December 2019 before the crash in crude oil prices and before the coronavirus pandemic hit. That said, the concepts that we discuss in this episode are relevant regardless of the reason for shutting in production. In fact, this topic may be even more relevant with the current price environment of $20-30 for WTI crude oil, given many operators have shut-in production that is not economic to produce at these prices.
Also, when prices recover and operators start completing wells again, you will know what to look for and the questions to ask regarding your wells when it comes to frac interference.
Also, in case you missed it, we dove deeper into shut-in royalty payments in our recent conversation with Spencer Cox who is an attorney with Burns Charest LLP. You can find that discussion in Episode 53 of the Mineral Rights Podcast. In that episode, we talk about negative royalties and also dive a bit deeper into what you need to know about shut-in royalty payments in the current price environment.
Be sure to subscribe on iTunes and while you are there, please leave a review (or subscribe and review wherever you normally listen to the show). It only takes a minute and it really helps us out in gaining exposure so that other mineral and royalty owners can benefit from this information too.
Using the embedded player above, you can download the episode to your computer or listen to it here!
Reasons that Oil and Gas Wells Get Shut-In
Here is a common question that we see:
“I look on my state’s oil and gas commission website and see that a well on my property has the status of “shut-in” what does this mean?”
Simply put, it means the well is not currently producing. To put this in perspective, think of the water piping in your house. Shutting in a well is like closing the main shut-off valve to your house so that when you open the faucet nothing comes out. This is a similar situation to shutting in a well.
Why Existing Wells Get Shut-In
There are many reasons why an existing well may get shut-in.
- There might be operational issues that they need to go in and fix or perform a “workover” so that it is capable of producing again.
- Another common reason in an area with a lot of new wells being drilled. In this scenario, they may shut-in an “older” vertical well because they have drilled new horizontal wells next to it. They may plan to permanently plug & abandon the “old” vertical wells when they complete the new horizontal wells in the same formation.
- Another temporary situation is they may shut-in any existing wells while they are completing new wells in order to prevent an issue called frac-interference or frac hits. That is, when hydraulically fracturing a new well, the adjacent well may see an increase in down hole pressure or in extreme case may start producing frac water or sand that was pumped down hole in the new well.
- Shutting in the existing parent well and performing work is one of mitigation strategies used to prevent damage, or under performance of existing and/or newly completed wells.
- They shut-in the existing wells (aka “parent wells”) so the pressure is allowed to build
- They may perform work on the existing wells to mitigate negative consequences from the offsetting completions of new wells. This may include re-fracturing the parent well.
- Then when they hydraulically fracture the new “child wells” both parent/and child wells are protected and hopefully this will have prevented any damage to existing wells and any negative impact on well productivity.
Why New Wells May Get Shut-In
- Sometimes companies will drill a well and then not complete it (frac it) right away. There may be many reasons for this including budgetary reasons, or wanting to get enough wells so that they can more efficiently utilize a frac crew to complete multiple wells in an area at one time without disruption.
- Wells that are drilled but not completed are called DUC’s (not the kind that fly but Drilled Un-Completed wells).
- Sometimes these DUC wells show up with “shut-in” status on the state oil and gas commission website after they have been drilled.
Longer Term Shut-Ins (Due to Oil Prices or Other Reasons)
- If a well stays with shut-in status for an extended period of time and you are not receiving royalties on any wells on your lease (but you had been before), it may be time to dust off your lease to review the shut-in royalty clause.
- Many leases may say:
“. . .there is a well capable of producing oil or gas on the leased premises, or lands polled or unitized therewith, but the well is shut-in whether before or after production therefrom, and this lease is not being maintained otherwise as provided herein, this lease shall not terminate (unless released by Lessee) and it shall nevertheless be considered that oil or gas is being produced from the leased premesis during all times while the well is so shut-in. . . when the lease is continued in force in this manner, Lessee shall pay or tender to Lessor or Lessor’s successors or assigns, an amount of $1.00 per year per net mineral covered by the lease.”
- Many leases also say that such payments may be on or before the shut-in royalty payment date as defined in the lease, next occurring after the expiration of 120 days from the date that the well was shut-in, unless other conditions defined in the lease are met.
- IMPORTANT: if your lease allows for a shut-in royalty clause, it is important to place a limit to how long the Lessee can hold the lease by paying shut-in royalties. For example, it may say that the lease may not be maintained in force by the payment of shut-in royalties for any period in excess of two consecutive years from the date the well is shut-in.
- If the well is shut-in for extended period of time beyond this it may be that your lease is no longer in effect.
- If well is shut-in on your property, best way to find out more is to contact the operator’s owner relations department to find out what their plans are, and when they plan on restoring production.
- If you are faced with a potential situation around your wells getting shut-in, be sure to contact a qualified attorney in your jurisdiction to get help with interpreting the provisions in your lease and to best understand your options.
Resources Mentioned in this Episode
Thanks for Listening!
To share your thoughts:
- Leave a comment or question below (we read each one and your question may be featured in a future episode)!
- Ask a question or leave us feedback via email or voicemail: (720) 580-2088.
To help out the show:
- Leave an honest review on iTunes or wherever you get your podcasts – we read each one and greatly appreciate it. Plus, you can get a shout out on a future episode!
Thanks again – until next time!
