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RULE §9.36Shut-In Royalty

(a) During the primary term. If lessee completes a shut-in well during the primary term, lessee may hold the lease by resuming delay rental payments. See §9.34(b)(1)(2) of this title, (relating to Drilling and Reworking Operations).

(b) After the primary term has expired.

  (1) When a shut-in well is located on the premises, but the lease is being otherwise held in effect under the lease, no shut-in royalty is needed to maintain the lease.

  (2) If a lease is not being otherwise held in effect, contains a shut-in provision and has a shut-in well located on the premises, then failure to make a timely, full shut-in royalty payment will result in the lease automatically terminating on the date the shut-in payment is due under subsection (d)(1) of this section. However, if lessee timely pays a full shut-in royalty under this section, the lease will be held for one year beginning on the effective shut-in date. Thereafter, the lease will terminate automatically on an anniversary date of the effective shut-in date, unless on or before such anniversary date lessee pays a timely subsequent shut-in royalty under subsection (d)(2) of this section or on or before 60 days after such anniversary date lessee commences drilling or reworking operations or actually produces oil or gas.

  (3) If a lessee fails to pay or improperly pays a shut-in royalty, no action by any lessor, including the state or an owner of the soil on Relinquishment Act property, may ratify, re-grant or revive the terminated lease or may estop the state from asserting lease termination.

(c) Full payment of shut-in royalty. The lease sets the amount of the shut-in royalty payment and the full amount must be timely paid to all lessors to hold the lease. If the lease has several interest owners and any one such owner fails to pay its proportionate share of the full shut in royalty amount set in the lease, then the entire lease will terminate. Under the October, 1997 state fee form, the shut in royalty amount is the greater of the two following amounts:

  (1) double the annual delay rental provided in the lease (which amount may be subject to proportionate reduction if the lease contains such a provision and if acreage is released); or

  (2) $1,200 for each shut-in well.

(d) Timeliness of Shut-In Royalty Payment to the State.

  (1) For lessee to maintain a lease by paying a shut-in royalty payment, the GLO must receive such payment on or before the latest of the following dates:

    (A) the expiration of the primary term;

    (B) 60 days after the date the well ceases to produce oil or gas; or

    (C) 60 days after the date lessee completes drilling or reworking operations in accordance with the lease.

  (2) Subsequent shut-in royalty payments are due as established in subsection (h)(1) of this section.

  (3) If the date when a shut-in royalty payment is due falls on a Saturday, Sunday or a legal state or federal holiday, shut-in royalty payments may be timely received on the next calendar day which is not a Saturday, Sunday or a holiday.

  (4) Under the standard business practices and/or procedures of the GLO, the date that the GLO stamps, punches, or otherwise marks on the shut-in royalty payment, check, draft, stub, or envelope establishes the date of actual receipt by the GLO.

  (5) Payment of a shut-in royalty to the GLO shall be considered timely, irrespective of the date of actual receipt, if lessee notifies the GLO in writing of its claim that its lease has been maintained under this subparagraph and then establishes that:

    (A) payment was dispatched to the address found in §9.32(c)(3)(A) of this title, (relating to General Responsibilities of State Lessees) by certified or registered mail or equivalent proof;

    (B) an acceptance form was initialed by an employee of the United States Post Office, a common carrier, or its equivalent and the date stamped by the United States Post Office, a common carrier, or its equivalent (not including private postal meters) showing the letter was received and accepted at least 14 days before it was due;

    (C) payment is actually received by the GLO no later than 30 days after it was due; and

    (D) no intervening third party has acquired any of the oil and gas interests originally leased by lessee

(e) Affidavit required. Upon receipt of a shut-in royalty, the GLO will send a shut-in affidavit to the party paying the shut-in royalty. The affidavit must be completed and returned to the GLO. Failure to complete and return the affidavit as required may result in a penalty under §9.32(c)(3)(B)(iii), and/or forfeiture of the lease.

(f) Shut-in royalty on pooled leases. A shut-in well located within the boundaries of a pooled unit will be considered to be a shut-in well located upon each state lease within the pooled unit. The leases included within the pooled unit shall terminate unless shut-in royalties are paid on each lease wholly or partially within the unit, according to the terms of each lease.

(g) Intermittent production. A well on a lease maintained in force by shut-in royalty may be produced intermittently and shut in as often as desired. No additional shut-in payment is required during the year that the lease is held by shut-in royalty. However, such intermittent production and shut-ins shall not operate to change the due date for subsequent shut-in royalty payments under subsection (h) of this section or the date upon which actual production or additional drilling must occur under subsection (b)(2) of this section. Royalty also remains due on oil and gas that is intermittently produced.

(h) Subsequent shut-in payments.

  (1) For a maximum of five years after the effective shut-in date, lessee may pay subsequent annual shut-in royalties meeting the requirements set in this section on or before each anniversary of the effective shut-in date. Each such payment will maintain the lease for an additional year. The right to make subsequent shut-in royalty payments may end as described in subsection (i) of this section.

  (2) At the end of the maximum five year shut-in period provided for in the lease, the lease will terminate for cessation of production unless the operator or lessee begins actual production of oil or gas from the previously shut-in well or wells or otherwise maintains the lease in effect. After obtaining production from a previously shut-in well, the well may be shut in again for a maximum term of five years as provided in the lease and subsection (h)(1) of this section.

(i) Compensatory royalty on shut-in well.

  (1) Encroaching well adjacent to shut-in well. If a state lease is maintained by a shut-in royalty when production from an encroaching well is sold and delivered, lessee's right to maintain the state lease by payment of a subsequent shut-in royalty ceases but the lease remains in effect until the shut-in royalty period expires. The lease may be held in effect after such date for four additional and successive periods of one year each by paying monthly compensatory royalties;

  (2) Amount of the compensatory royalty.

    (A) The monthly compensatory royalty payment is calculated using the royalty rate set in the state lease that has the shut-in well and the market value of monthly production from the encroaching well.

    (B) If the annual total of the monthly compensatory royalty payments is less than what the annual shut-in royalty would have been for that time period, lessee shall pay additional compensatory royalty equal to the difference.

  (3) Due dates for compensatory royalty.

    (A) . The first monthly compensatory royalty is due on the last day of the second month after the shut-in royalty period expired. This first compensatory royalty is computed using the encroaching well's production for the month immediately after the shut-in royalty period expired. Thereafter, monthly compensatory royalties are due by the last day of each month and are computed on the encroaching well's production for the preceding month.

    (B) For each year that monthly compensatory royalties are paid under subsection (i)(1) of this section, lessee shall remit additional compensatory royalty owed under subsection (i)(2)(B) of this section within 30 days of the end of each such year.

  (4) Limited effect of compensatory royalties. Payment of compensatory royalties under this section does not satisfy the obligations to drill offset wells or of reasonable development. To pay a compensatory royalty in lieu of an offset obligation, written approval from the commissioner must be obtained under §9.37(c) of this title, (related to Offset Well Obligations & Compensatory Royalties).

Source Note: The provisions of this §9.36 adopted to be effective January 7, 1999, 24 TexReg 146

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