How to Simplify the Shut-in Royalty Payment Process in 5 Easy Steps

Well shut-in payments are complex, but following a few best practices makes them a whole lot easier
 

“The oil and gas shut-in royalty payment process is the easiest process on the planet to manage. I can do it in my sleep, it’s so easy.”

When was the last time you heard one of your oil and gas peers say that? My guess would be never, unless that person did in fact live on another planet or was in fact sleeping.

The fact of the matter is, well shut-ins are complex. To manage them appropriately, many groups across the organization have to be involved: the land administration team, because they manage the leases; the operations team, because they drill the wells; and the production team, because they track when wells are producing or not.

All the different moving parts is one complexity, the varying nature of individual wells and leases is another. For example, one of your wells could be producing a ton of gas but not a lick oil, but it should still be marked as “producing.” Another well on a multi-well lease may not be producing while the others on the lease are. This means shut-in payments don’t have to be made. A completion on one of your dual-completion wells may have shut down while the other is still operational, which, again, means shut-in royalties don’t have to be paid out.

Because of the inherent complexity of well shut-in payments, several best practices should be followed to ensure that the right royalty payments are made for the right leases at the right time.

Those best practices are…
 

Best Practice #1: Know Which Leases Have a Shut-In Provision

Some of your leases probably don’t have a shut-in provision, so your land database should indicate which ones do and which ones don’t. You should also have the payment-timing information – how many days the well can be shut-in before a payment has to be made – attached to each lease that has a shut-in provision. Because some provisions are 60 days, others are 90 days and still others are 120 days.
 

Best Practice #2: Know Which Wells and Completions Are Attached to Which Leases

If you know which leases have a shut-in provision and which wells and completions are attached to those leases, you can quickly determine which wells need to be checked for their status prior to making a payment.

Using a centralized land database should make it easy to quickly discern which wells and completions are attached to which leases. If you know this information, you can quickly generate a list of the wells that need to be checked for their status prior to making a payment.
 

Best Practice #3: Don’t Rely on a Well’s “Status” … Look at Its “Production” Information

When a well goes from producing to shut-in or vice versa, the production team oftentimes doesn’t change the status right away. For that reason, it’s important to look at the well’s production information, namely, has the well’s production been zero for the period, even if the status still indicates producing? This helps understand its true status.
 

Best Practice #4: Track the Payments That Have Been Made

You should have the ability to quickly query to see which payments have been made for which leases.
 

Best Practice #5: Have a Standard Workflow in Place That Notifies the Right People When Payments Are Due

A standard workflow for making shut-in royalty payments, integrated across your land and production systems, makes your teams more efficient and reduces the risk of losing any of your leases because of a missed payment.

Adhering to these best practices minimizes the complexity associated with the shut-in royalty payment process.
 

About The Author
Alex Schultz works on P2’s corporate marketing and communications team. Prior to coming on board at P2, Alex worked as a news and sports reporter in California’s San Joaquin Valley, where he covered everything from local politics and citrus farming to college baseball and senior slowpitch softball leagues. When he’s not writing about the innovative and resilient upstream oil and gas community for P2, you’ll likely find Alex in one of two places: at Folsom Field in Boulder, CO, watching (and usually regretting his decision immediately) a University of Colorado football game, or trying (and usually failing) to hook a rainbow trout from one of Colorado’s mountain streams. Alex holds a bachelor’s degree in journalism from CU-Boulder.