Opinion ID: 1230173
Heading Depth: 1
Heading Rank: 4

Heading: The Shut-in Royalty Clause

Text: As noted in Part B above, the shut-in royalty clause plays a specific role in the continuation of the lease where the well is shut-in for a period of one year. In Gard v. Kaiser, 582 P.2d 1311 (Okla. 1978), this Court looked at the effect such a clause has where the subject gas well was shut-in for three years due to low gas pressure. Prior to being shut-in, the well was completed and began production before the primary terms expired. Thus, the term of the lease was extended under the habendum clause as long as the well was capable of producing in paying quantities. However, because of low pressure, gas from the well could not enter a pipeline without additional equipment which lessee failed to install. Thus, gas was not marketed during the shut-in period. The lessors brought an action to cancel the leases on the grounds that the lessees failed to pay the shut-in royalty payments. They argued that according to the language of the lease, as soon as production ceased and the well was shut in, the lease automatically terminated. The Court noted that in Oklahoma the shut-in royalty clause is `not required as an additional special limitation to extend the term' of an oil and gas lease after a commercial discovery of gas satisfies the habendum clause. 582 P.2d at 1313 (quoting 4 Kuntz, The Law of Oil and Gas, § 46.3). Such a commercial discovery (capable of producing in paying quantities) extends the lease with or without the shut-in royalty clause, and the lease continues subject to forfeiture for failure to comply with the implied obligation to market the product. Id. We then held that shut-in gas provisions are not to be construed as limitations or conditions which would affect termination of the leases, 582 P.2d at 1314-15. Thus, the failure to pay shut-in royalties in and of itself does not operate to cause a termination of the lease. Rather, it is the failure to comply with the implied covenant to market which results in lease cancellation. In the situation at bar, lessors/mineral owners did not receive any royalty payments because gas was not being sold from the wells for a short period of time. The well, for all practical purposes, was shut-in for a period less than one year. Thus, if the well stayed in this shut-in state for one full year, the mineral owners would be entitled to the minimum shut-in royalty payment of fifty dollars ($50.00) as they agreed to be bound to in the lease. If the lessees chose to market gas from the wells, the mineral owners would receive royalty payments just as they have during the winter months. Either way, the mineral owners get paid what they are entitled to under the terms of the lease. If we were to interpret the cessation of production clause to require marketing, then the shut-in royalty clause would be rendered meaningless. The lessees would not be able to shut-in the well and pay shut-in royalties to keep the lease viable because the cessation of production clause would mandate continuous marketing of gas. Thus, such a construction of the cessation of production clause would nullify the provisions of the shut-in royalty clause. The cessation of production clause cannot be interpreted in the manner asserted by the mineral owners.