North Dakota Shut-in Provisions

Lease Extension “Savings” Clauses:
North Dakota Shut-in Provisions

Since most lessees will not actually covenant – make a promise – to drill for oil and gas, the mineral lease will generally:

• provide the lessee with an option to drill or search for minerals during the primary lease term,
  and
• allow the lessee to continue the lease past the primary term upon the occurrence of certain events (a “savings event“).

Therefore, even though the primary term of a mineral lease may be relatively short, the full duration of the lease may be significantly longer by reason of its extension into a secondary term due to the application of one or more of the following savings clauses:

1. drilling operations provisions,
2. cessation of production provisions,
3. shut-in provisions,
4. dry hole provisions,
   and
5. force majeure clauses.

Shut-in provisions with be addressed in this section.

North Dakota Shut-in Provisions

A shut-in provision will generally extend the lease term whenever gas is not being produced from a well that is technically able to produce it in commercial quantities.

The demand for natural gas, and thus its price, tends to fluctuate to a greater extent than oil.

During periods of low demand and low prices:

• it may not be commercial feasible for a lessee to sell the natural gas produced by a well,
• the well may be shut-in,
  and
• the gas may be left in the ground.

A shut-in provision usually requires the payment of a “shut-in royalty” – but such a “royalty” is often just a nominal amount.

North Dakota Shut-in Provisions – Modern Lease

An oil and gas lease proposed to be used in North Dakota in the last few years by one oil company contained the following “shut-in provision“:

Where gas from a well capable of producing gas is not sold or used, Lessee may pay or tender as royalty to the royalty owners One Dollar per year per net royalty acre retained hereunder, such payment or tender to be made

• on or before the anniversary date of this lease next ensuing after the expiration of 90 days from the date such well is shut in
  and thereafter
• on or before the anniversary date of this lease during the period such well is shut in.

If such payment or tender is made, it will be considered that gas is being produced within the meaning of this lease.

Note that the above shut-in provision relates only to natural gas.

North Dakota Shut-in Provisions – 1981 Lease

For comparison purposes, an oil and gas lease actually used in Ward County, North Dakota in 1981 by an oil company in the business of oil exploration contained the following “shut-in provision“:

If at any time, either before or after the expiration of the primary term of this lease, there is any gas well

• on the lands covered hereby,
  or
• on other lands with which said lands are pooled or unitized,

which

• is capable of producing in paying quantities,
  but which
• is shut-in either before or after production therefrom, and the production therefrom is not being sold or used,

lessee agrees to pay or tender to the mineral owners in the depository bank named in the lease, as royalty, a sum equal to the amount of delay rentals payable under this lease.

Such payments shall be made on or before the shut-in royalty payment date, as herein defined, next accruing after the expiration of ninety (90) days from the date the well was shut-in, unless prior to such date gas from the well is produced and sold or used.

In like manner, on or before each succeeding shut-in royalty payment date while such gas well remains shut-in, lessee shall make payment of shut-in gas royalty in the same amount and manner.

A shut-in gas well capable of producing in paying quantities shall be considered under all provisions of this lease as a producing well and this lease shall be in force, and effect in like manner as though the gas therefrom were actually being produced and sold or used.

The term gas well shall include wells capable of producing natural gas, condensate, distillate, or any gaseous substance, and wells classified as gas wells by any governmental authority.

The term shut-in royalty payment dates shall mean

• any rental-paying date of this lease if within the primary term,
  or
• any subsequent anniversary thereof, if after the primary term, or any anniversary date of this lease if no rental-paying date is specified herein.

Note that under the 1981 lease, the amount of the shut-in royalty was to be equal to the amount of delay rental payments.

North Dakota Shut-in Provisions – 1977 Lease

For further comparison purposes, an oil and gas lease actually used in Ward County, North Dakota in 1977 by an oil company in the business of oil exploration contained the following “shut-in provision“:

If at any time while there is a gas well or wells on the above land
(and for the purposes of this clause (c), the term “gas well” shall include wells capable of producing natural gas, condensate, distillate or any gaseous substance and wells classified as gas wells by any governmental authority)
such well or wells are shut in,

and if this lease is not continued in force by some other provisions hereof,

then it shall nevertheless continue in force for a period of ninety (90) days from the date such well or wells are shut in, and

• before the expiration of any such ninety (90) days period,
• lessee or any assignee hereunder may pay or tender an advance annual royalty equal to the amount of delay rentals provided for in this lease for the acreage then held under this lease by the party seeking such payment or tender,
  and if such payment or tender is made,
  • this lease shall continue in force
    and
  • it shall be considered that gas is being produced from the leased premises in paying quantities within the meaning of paragraph 2 hereof for one (1) year from the date such well or wells are shut in,

  and

• in like manner subsequent advance annual royalty payments may be made or tendered and this lease shall continue in force and it will be considered that gas is being produced from the leased premises is paying quantities within the meaning of said paragraph 2 during any annual period for which such royalty is so paid or tendered;

such advance royalty may be paid or tendered in the same manner as provided herein for the payment or tender of delay rentals; royalty accruing to the owners thereof on any production from the leased premises during any annual period for which advance royalty is paid may be credited against such advance payment.

Note that under the 1977 lease, the amount of the shut-in royalty was to be equal to the amount of delay rental payments.

North Dakota Shut-in Provisions – Comparison of Lease Terms

With the exception of additional details regarding the timing of the payment of shut-in royalties, there are no significant differences between the terms of the three shut-in provisions identified above.

North Dakota Shut-in Provisions – Suggested Lease Provisions

Lessors may wish to limit the period during which the lease can be extended beyond the primary term by the shut-in payments – perhaps to:

• no more than three consecutive months,
  and
• no more than 2 years.

Lessors may also want the leases to provide that if shut-in royalties are not timely and properly paid, the lease will automatically terminate.

North Dakota Shut-in Provisions

Topics of Interest – North Dakota Ancillary Probate

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Topics of Interest – North Dakota Intestate Succession.

Topics of Interest – North Dakota Informal Probate

Topics of Interest – North Dakota Intestate Succession.