Got an oil or gas well on your property that is not paying you a royalty?
Lease negotiation is one tool to reduce the likelihood of not paying the landowner when an oil and gas well may be present.
May 21, 2015 - Author: Curtis Talley Jr., Michigan State University Extension
There are several reasons an oil or gas well may be present, but not producing a royalty. The old adage an ounce of prevention is worth a pound of cure is recommended for mineral owners wanting to prevent this from happening.
As a Michigan State University Extension receives a number of inquiries from landowners that have oil and gas wells on their property, but are not currently receiving a royalty. In some instances they have not received a royalty in years. They want to know why the well is allowed to still be present if it is not paying anything. Is there a way to cancel the oil and gas lease because there are no royalties currently?
Here are some reasons a well or multiple wells can be present, not paying a landowner and in compliance with Michigan’s oil and gas regulations or with the underlying oil and gas lease.
The well may not be earning enough to pay a royalty regularly. When a well is completed, before being paid, the mineral owner is asked to sign a division order. This should re-state the mineral owner’s share of the well, and thus their share of the proceeds. It is very common for the division order to allow the company to accrue royalties until a designated amount is accrued, such as $100. Until the accrued royalty to be paid reaches that amount, it is held by the company. A well that is on its last legs may take quite some time to accrue the minimal amount to pay a royalty.
No shut-in royalty payment is required in the lease. A shut-in well is one that has been drilled, but for any of a number of reasons is off-line or “shut-in.” Many oil and gas leases, such as the industry standard referred to as the Producer 88 state that a landowner will be paid a shut-in royalty, but only if certain conditions are met. It is common for a payment to be a few dollars per acre per year, but can be negotiated higher, and is paid until the well is no longer shut-in. For example, the lease may state “If all wells on said land, or on lands pooled or unitized with all or part of said land, are shut in”. In this case, a shut-in well payment will not be paid if the well is part of a multi-well unit and all wells associated with the well in question are also shut-in.
The well operator has received a change in well status. For example, a particular well that produced for a time, may be converted for use as an observation well to determine the effectiveness of a secondary recovery operation, such as water flooding. Secondary recovery is a term for techniques used to increase the amount of crude oil that can be extracted from an oilfield, usually older oil and gas fields. It is used when there is not adequate pressure to push the oil to the well bore. Water flood can re-inject the brine water that flows to the surface with oil and gas back into the formation to increase pressure and cause the remaining hydrocarbons to migrate to the target well. A change in well status of this type does not require landowner notification.
The operator has been approved to re-classify the well as an injection well. An operator can convert a previously drilled oil well to an injection well by submitting an application change of well status (ACOWs) and the information required in Rule 201(2)(k)(i) through (ix) of Michigan Oil and Gas Regulations. If your oil and gas lease has language similar to this “establish and utilize wells and facilities for disposition of water, brine or other fluids” the well operator can convert the well to an injection well and dispose of not only fluids from your well, but from other lands as well. This lease language allows the operator to operate the injection well and not pay the landowner/mineral owner for this usage.
The operator has been granted permission to temporarily abandon the well. The costs to drill, equip, produce and maintain a well can be significant. If there are temporary conditions that do not allow the well to operate for its intended purpose, the operator can request temporary abandonment status. Items such as future deepening or re-completion, conversion to another well type, processing constraints, and connection to a sales line are approvable reasons. It is allowed only upon written application to, and approval of the Supervisor of Wells. If the well has not been used for its permitted purpose during 12 consecutive months, the operator is required to plug or produce the well, unless the well is granted temporary abandonment status. The term of the initial temporary abandonment status shall not be more than 12 months, unless the well is shut-in awaiting the connection of a sales line. For a well that is shut-in awaiting connection of a sales line, the term of the initial temporary abandonment status shall be up to and including 60 months. Additionally, extensions of temporary abandonment status beyond the initial term may be granted by the supervisor if conditions warrant. When approving the extensions, the supervisor may require special actions and monitoring.
As you can see, there are many reasons a well may not be paying the mineral owner, but that does not mean there are not options if your goal is to require the company to either comply with the rules, or abandon the well permanently and cancel the lease.
Negotiate an acceptable lease initially. Remember, prevention an ounce of prevention is worth a pound of cure. Before you sign an oil and gas lease, make sure you understand whether or not provisions mentioned above are included and if not acceptable, negotiate changes or do not sign a lease you will not be happy with long-term. Negotiating the removal of the words “permanently ceased” and substituting “in paying quantities”, along with other language dealing with what triggers lease termination can provide the landowner with more clout to ask that the lease be canceled. The examples above are reasons why it is said that oil and gas leases can last for generations. This is great if you are receiving a royalty, but for those mineral owners that have not received a royalty in some time and no longer want an oil and gas lease encumbering their property title, it can be frustrating.
The OOGM has developed an online database that allows the public to access oil and gas well information. You can use the site to determine the current status of the well. This can help you determine if the well is still considered an operational well, is temporarily shut-in etc. The well permit number is necessary. If you have difficulty, you can contact your district office and they can look up the information for you.
Rule R 324.903 of Michigan’s oil and gas regulations states: “A permittee of a well shall commence plugging operations within 90 days after drilling completion or well completion as a dry hole, when the well has not economically produced or has not been utilized for its permitted use for more than 12 consecutive months, when a change of well status has not been granted, or when the permitted use has been suspended for more than 12 consecutive months”. As the rule is interpreted by the OOGM, the permittee in some instances can theoretically pump the well one time per year and satisfy the 12 month rule. The supervisor may require, or a permittee may submit, proof that is necessary to determine if the well is being economically produced. If there is not sufficient evidence to allow the well to continue, the supervisor can order it to be plugged.
If you have questions about the production or status of your well, contact the OOGM in your region, or use the online information to retrieve oil and gas records.