Shutting in Oil Well

Shutting-in: For What Reasons and For How Long?
Robert E. Beck*
1. Introduction.............................................................. 749
II. Shutting-in: The Reasons .................................................. 752
A. How Should the Shut-in Royalty Clause that Specifies no Reason for
Shutting-in be Interpreted? ............................................. 754
B. Should the Permissible Reasons for Exercising the Shut-in Royalty Clause be
Identified in the Clause? .. .. . . . . . .. .. . .. . .. . . .. . .. . .. . .. .. . .. . .. . .. .. . . . 766
C. What Form Should the Expression of Reasons in the Shut-in Royalty Clause
Take? ................................................................ 768
1. Problems that have Arisen Either as to the Reason for Including the Shut-
in Royalty Clause in the Lease or as to Reasons for Shutting-in. . . . . . . . . . 769
a. Creation of a Special Limitation and the Obligation to Pay. . . . . . . . . . . 769
b. Effect of Pooling ........ . . . . .. .. .. . .. . .. . .. . .. . . . .. . .. .. . . .. .. . . 773
c. The Lack of Market Requirement ................................. 774
2. Summary Check-list and Some Suggested Language. . ..... ... . .. . . . . .. . 776

III. Shutting-in: For How Long? . . .. . .. .. .. . .. . .. . . . . . . .. . .. .. .. . .. . .. . . . . . .. .. . 777
A. Implied Covenant to Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 779
B. Duration Commensurate with the Reason ................................ 782
C. Express Language. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783

IV. Conclusion ............................................................... 785
I. INTRODUCfION
Oil and gas leases executed today usually contain a provlSlQn

termed a "shut-in royalty clause." Howard R. Williams dates the ori
gin of the clause to the 1930s,1 identifying a substantial growth in its
use during the 1940s and 1950s,2 Despite fifty-plus years of use and
experience, Williams notes that there are "almost innumerable vari
ants in its form"3 and then classifies and discusses the variations as to:
(1) primary and secondary terms;4 type of well;5 capability of the well
• Professor of Law, Southern Illinois University at Carbondale; B.S.L., 1958; LL.B., 1960,
Minnesota; LL.M., 1966, New York University.
1. 3 HOWARD R. WILLIAMS, OIL AND GAS LAW § 632 (1993) (hereinafter WILLIAMS).
However, Ketchum v. Chartiers Oil Co., 5 S.E.2d 414, 415 (W. Va. 1939), contains a 1924 lease
which provides for payment of $75 in advance each three months for gas produced from each
well that is marketed and sold or, according to the court, "while the well is shut in as a gas well."
Freeman v. Magnolia Petroleum Co., 171 S.W.2d 339.415 (Tex. 1943). In Freeman the lease
containing a shut-in royalty clause was dated April 7. 1930. Id. See Navajo Tribe v. United
States, 364 F.2d 320, 328 (0. CI. 1966), which involved a 1923 lease with shut-in language that
the court contrasts with and distinguishes from the clause in Freeman. The Navajo Tribe provi
sion is set forth infra note 56 and accompanying text. See also the clause in Steven v. Potlach Oil
and Refining Co., 260 P. 119 (Mont. 1937) (1921 lease).
2. WILLIAMS, supra note 1. Leslie Moses observed in 1949: "Although of fairly recent
origin, the shut-in clause now appears on most standard leases." Leslie Moses. Problems in
Connection With Shut-In Gas Royalty Provisions in Oil and Gas Leases, 23 TULANE L. REV. 374,
379 {1949}.
3. WILLIAMS, supra note 1. In LeLong v. Richardson, 126 So. 2d 819, 827 (La. Ct. App.
1961). the court notes that the "forms of the shut-in royalty provision are as varied as the lease
forms in present day use." Id., quoting Moses, supra note 2, at 375.
4. WILLIAMS, supra note I, § 632.1 (does it apply in both the primary term and the secon
dary term or only in one?).
5. [d. § 632.2 (does it apply to a "gas only" well or what kind?). Vernon v. Union Oil Co.,
270 F.2d 441 (5th Cir. 1959); Duke v. Sun Oil Co., 320 F.2d 853 (5th Cir.), on reh'g 323 F.2d 518
(5th Cir. 1963) (interpreting what is a well "producing gas only").
749
750 Washburn Law Journal [Vol. 33
to produce;6 reasons for shutting-in;7 and references to specific

events.s Over the years these clauses have been involved in a consid
erable amount of litigation,9 and numerous journal articles have been
written about them. Indeed, Professor John Lowe has authored a de
finitive study of what the lessee must do to trigger and maintain the
operation of the clause,lO assuming the pre-conditions for its exercise
exist, in which he includes a comprehensive bibliography.ll
Despite the cases and articles, Williams comments about his
fourth category of differences among the forms-reasons for shutting
in-as follows: "Insufficient attention has been given in the drafting
of shut-in royalty clauses to the question of whether the clause should
specify permissible grounds for shutting-in of a well on which shut-in
royalty may be paid."12
A 1993 Kansas Supreme Court decision, Tucker v. Hugoton En
ergy Corporation,B reinforces the propriety of the comment. Tucker
involved a lease that contained a shut-in royalty clause that did not
state any reason for shutting-in. The lessee paid shut-in royalties in a
timely manner and in the correct amount; however, the court held that
compliance with the clause did not perpetuate the lease because
"there was a limited market available to defendants-lessees."14 The
shut-in royalty clause applies only "when no market exists."15 Profes
sor Eugene Kuntz has long expressed the view that "if the clause does
not specify want of a market as the necessary cause of shutting-in a
6. WILLIAMS, supra note 1, § 632.3 (is capability of producing in paying quantities a pre
condition?).
7. Id. § 632.4 (the focus of this paper).
8. Id. § 632.5 (a catch-all that notes variants other than those in supra notes 4-7).
9. See infra note 25; A. Petry, Annotation, Shut-In Royalty Payment Provisions in Oil and
Gas Leases, 96 A.L.R. 2D 345 (1964).
10. John S. Lowe, Shut-In Royalty Payments, 5 E. MIN. L. INST. 18-1 (1984). Freeman v.
Magnolia Petroleum Co., 171 S.W.2d 339 (Tex. 1943), is a classic case (payment not made in
time). Compare Navajo Tribe v. United States, 364 F.2d 320 (Ct. Cl. 1966).
See also Robinson v. Continental Oil Co., 255 F. Supp. 61 (D. Kan. 1966); Steeple Oil & Gas
Corp. v. Amend, 337 S.W.2d 809 (Tex. Civ. App. 1960),392 S.W.2d 744 (Tex. Civ. App. 1965),
394 S.W.2d 789 (Tex. 1965); Gulf Oil Corp. v. Reid, 337 S.W.2d 267 (Tex. 1960) (distinguishes
Union Oil Company v. Ogden, 278 S.W.2d 246, 247 (Tex. Civ. App. 1955), where lessee was
laying pipeline as involving "drilling operations").
11. Lowe, supra note 10, Appendix. This two-page bibliography lists not only the appropri
ate references to five treatises and an A.L.R. annotation, but also lists 26 extant articles as of
1984. The heyday for writing about the clause was the 1960s with twelve articles; otherwise there
was one for the 1930s, two for the 1940s, eight for the 1950s, two for the 1970s, and one for the
1980s. To this list one adds Lowe's own contribution plus Note, The Shut-In Royalty Clause:
Balancing the Interests of Lessors and Lessees, 67 TEX. L. REv. 1129 (1989). Of importance also
is Bruce M. Kramer & Chris Pearson, The Implied Marketing Covenant in Oil and Gas Leases:
Some Needed Changes for the 80's, 47 LA. L. REV. 787, 801-08 (1986). One article from the
1960s that Lowe did not include that can be useful is James B. Sandlin, Interstate Marketing of
Gas, The Implied Covenant to Market and the Shut-In Gas Well Royalty, 17 ARK. L. REv. 104
(1963).
12. WILLIAMS, supra note 1, § 632.4, at 412.
13. 855 P.2d 929 (Kan. 1993).
14. Id. at 936.
15. Id.
1994] Shutting-in 751
gas well, there is no reason to read such a provision into the clause."16
However, that is exactly what the Kansas Supreme Court did, read
into the clause a no-market requirement. The only reason that the
Kansas Supreme Court gives for requiring that no market is available
is that the clause "serves the interests of both parties only in situations
where no market exists for the gas."17 This difference of opinion be
tween the leading academic authority on oil and gas law and the Kan
sas Supreme Court will be examined in more detail later in this paper.
Putting together the commentary of Williams and that of Kuntz,
we arrive at the three questions to be considered in Part II of this
paper:
1. If no reason for exercising the shut-in royalty clause is identi
fied in the clause, in what situations should the clause be interpreted
to allow the lessee to shut-in a gas well?
2. Should the permissible reasons for exercising the shut-in roy
alty clause be identified in the clause?
3. If the reasons for exercising the shut-in royalty clause should
be identified in the clause, what form should the identification take?
There is, however, an associated problem that will be the focus of
Part III of this paper: Once the clause has been invoked properly,
how long can the lessee keep the well shut-in? The length of the shut
in, presumably, is associated with the reason for shutting-in, at the
very least because the tempting answer to the Part III question is: As
long as the reason for shutting-in the well in the first place continues
to exist. However, there is more to it than that. Professor John Lowe
has put the question (and suggested answer) this way:
The length of time for which shut-in royalty payments may be
substituted for production is a common problem. The underlying
issue is whether the provision for shut-in royalty payments relieves
the lessee from the implied obligation to market within a reasonable
time. It probably does not. 18
And certainly the Kansas Supreme Court in the Tucker case concurs:
"The fact a lease is held by payment of shut-in gas royalties does not
excuse the lessee from its duty to diligently search for a market and to
otherwise act as would a reasonable and prudent lessee under the
same or similar circumstances."19 Parts II and III will be followed by
a concluding section that ties them together. 20
16. 4 EUGENE KUNTZ, A TREATISE ON THE LAW OF OIL AND GAS § 46.4(c), at 17 (1990).
17. Tucker, 855 P.2d at 936.
18. JOHN S. LoWE, OIL AND GAS LAW IN A NUTSHELL 267 (2d ed. 1988). Lowe then cross
references to his discussion of the implied covenant to market. rd.
19. Tucker, 855 P.2d at 936.
20. Thus the paper does not explore how the shut-in clause is invoked, whether there is a
pre-condition of a well capable of producing in paying quantities, what types of wells are cov
ered, or whether the payments are royalties or delay rentals, except as these topics might relate
directly to the questions covered. The reference throughout this paper, therefore, is simply to a
II. SHUTIING-IN: THE REASONS
As noted in Part I, this part will focus on three questions:

1. If no reason for exercising the shut-in royalty clause is identi
fied in the clause, in what situations should the clause be interpreted
to allow a lessee to shut-in a gas well?
2. Should the permissible reasons for exercising the shut-in roy
alty clause be identified in the clause?
3. If the reasons for exercising the shut-in royalty clause should
be identified in the clause, what form should the identification take?
However, before turning to the first question, it is useful to in
quire into what reasons for shutting-in have been provided in shut-in
clauses in past and existing oil and gas leases.21 A review of the rea
sons provided in the clauses quickly confirms Williams' general obser
vation that "innumerable variants" exist.22 In addition to the category
of clauses that contain no expressed reason, when classified according
to the reasons shutting-in is allowed, the shut-in royalty clauses seem
to fall into four categories. 23 While the next four paragraphs primarily
identify these categories, and give examples of each, they also include
some preliminary comments.
The first category is the no-market category. It contains the fol
lowing variants: "No market or demand therefor;" "lack of market;"
"market at the well does not exist;" "market cannot be secured;"
"cannot be profitably produced for lack of a market at the well."
Sometimes, language in this category is coupled with: "or not being
used off the land or in the manufacture of gasoline or other product"
or similar language. But is even this category free from doubt? First,
it has been argued that a distinction should be made between the first
and second examples and that the second example should be inter
preted to mean lack of a "reasonable" market and, therefore, not re
quire a "no market" precondition.24 Second, the next category of
shut-in royalty language suggests that the meaning of the clauses in
this first category might not be clear.
gas well. See generally RICHARD W. HEMINGWAY, THE LAW OF OIL AND GAS § 6.5 (3d ed.
1991).
21. The examples that follow have been taken from all of the cases, texts, and treatises cited
in this paper.
22. See supra text accompanying note 3. In LeLong v. Richardson, r.6 So. 2d 819, 827 (La.
Ct. App. 1961), the court noted that the "forms of the shut-in royalty provision are as varied as
the lease forms in present day use" and then listed clauses from "four typical forms." Of those
four, two contained the identical phrase "because of no market or demand therefor," one stated
"for lack of a market at the well or wells" and one stated no reason. [d., quoting Moses, supra
note 2, at 376.
23. There may be some coupling of reasons in the actual leases that are not reflected in the
listings within these groups.
24. Note. supra note 11. at 1129.
The second category includes as reasons to shut-in: "market or

transportation difficulties;" "inability to obtain a pipeline connection
or to market;" "the pipeline connection or market is lost or ceases
through no fault of the lessee;" "the lack either of a market at the well
... or ... an available pipeline outlet in the field." Thus, if one would
have been tempted to interpret category-one clauses as saying that
there is no market when you cannot get a pipeline connection, the
language in the second category raises at least some doubt about such
an interpretation. If category-one language was thought to cover the
situation, why add the transportation or pipeline language? Are the
drafters being unduly concerned? Perhaps category one means what
it says, there is no market, that is, no demand for the gas, and not that
there is a market but you cannot get to it.
The third category includes marketing problems beyond a lack of
market and securing a pipeline connection as reasons to shut-in a well.
The category-two entry "market or transportation difficulties" alludes
to this third category. One assumes that "market difficulties" encom
passes more than just a total lack of a market. To this entry one adds
the following, perhaps clearer, examples: "unable to market advanta
geously;" "due to lack of a satisfactory market;" "not produced for
lack of a suitable market;" "lack of or an intermittent market;" "no
market ... is available ... at the prevailing market price;" "when no
reasonable or convenient gas market is available;" and "deem it inad
visable to produce and sell gas from such well or wells."
The fourth category includes the following examples: "by reason
of Force Majeure;" "by reason of federal or state laws, executive or
ders, rules or regulations or other reasons beyond the reasonable con
trol of lessee;" "any cause whatsoever beyond the Lessee's reasonable
control;" and "because of lack of market or government restrictions."
The last clause, in particular, can be the object of great fun for it can
be interpreted to read: "lack of market or [lack of] government re
strictions;" indeed, another example clause, "due to lack of market or
equipment," better illustrates this reading. It will not work well (per
haps not at all?) to read that clause as "due to lack of market or [due
to] equipment." The intended reading certainly seems to be "due to
lack of market or [due to lack of] equipment."
Within each of the above four categories a lot of time and space
could be devoted to discussing whether each phrase is precisely paral
lel with the others or whether some are broader or narrower in scope
than others, and, therefore, of course, courts could devote time and
space to distinguishing a case involving one of the variants from a case
involving another variant in the category. Is there any justification in
the variation?25 Standardization certainly would reduce the need to

compare clauses. To some extent in the process of standardization
drafters probably would include language that would answer many of
the questions that have arisen about shut· in royalty clauses.
Because the shut·in royalty clause is entirely a creature of agree·
ment between lessor and lessee,26 the first-blush answers to the two
general questions explored in Parts II and III of this paper (for what
reasons can a well be shut-in, and for how long) are: (1) the well can
be shut-in for whatever reason the shut-in royalty clause says that it
can; and (2) it can be shut-in for as long as the clause says it can.
However, like any private contract, the stipulations of the parties
would be subject to scrutiny as to whether they violate public policy.
So at the very outset it is necessary to raise the question whether the
Kansas Supreme Court would enforce a shut-in royalty clause that
provided expressly that the well could be shut-in in situations other
than when there was a total lack of market.27 The question is raised
because the Kansas Supreme Court seemed so adamant in Tucker that
a shut-in royalty clause was of no value to a lessor except when the
no-market condition existed. It is not resolved because the shut-in
royalty clause before the Kansas Supreme Court in Tucker did not
attempt to list situations in which shutting-in would be permitted.
A. How Should the Shut-in Royalty Clause that Specifies no

Reason for Shutting-in be Interpreted?
While text-writers generally identify the purpose of the shut-in

royalty clause in an oil and gas lease to be to provide a mechanism to
preserve the lease at the end of the primary term even though there is
25. In 1960 Eugene Kuntz wrote:

The use of the shut-in gas royalty provision has been productive of many disputes.
There is no generally accepted standard form of such provision in use. As a conse
quence, all problems which are created are not likely to be solved in the near future by
decision for the reason that the problem is one of construction, each case necessarily
stands only for the proper construction of the particular instrument before this court.
12 Oil & Gas Rep. 876, 878-79 (1960).
Kuntz identified numerous problems with the clause in Carlisle v. United Producing Co.,
278 F.2d 893 (10th Cir. 1960): (1) the use of the words "gas only;" (2) what happens if gas is sold
in a "spasmodic" market or when gas is used to drill other wells; (3) what is the anniversary date
for payment; (4) failure when referring to delay rental payments to refer to other clauses associ
ated with the delay rental; (5) effect of surrender of a portion of the premises; and (6) whether
the payments are optional or obligatory.
26. Most of the time the shut-in royalty clause is a part of the lease, but a shut-in agreement
may be negotiated subsequent to the lease. See, e.g., Bristol v. Colorado Oil & Gas Corp., 225
F.2d 894 (10th Cir. 1955) (some oo-tenants signed; others did not sign but accepted payments
pursuant to same contract); Flag Oil Corp. v. King Resources Co., 494 P.2d 322 (Okla. 1972)
(lease in 1957; two-year shut-in clause executed by parties in 1960).
27. Answering the question, however, is beyond the scope of this paper for Kansas or for
any state, because the answer requires looking at a state's total jurisprudence on oil and gas
development.
no market for the gas that would allow the requisite "production,"28
many clauses do not mention any reason for including the clause. 29 It
is clear simply from the language used in these clauses that, over the
years, reasons other than a lack of market have permitted shutting-in
wells.30 Thus where a shut-in royalty clause drafted in 1994 fails to
specify the reason for shutting-in the well, one could make a persua
sive argument based simply on the language history of the clause for
not limiting the exercise of the clause to a fact situation where there is
no market.31 As Kuntz points out in a different context, the problems
associated with shutting-in wells have become more complex since the
clause was first created32 and, therefore, the clause now "may have a
fundamental purpose that is much broader than was originally appar
ent."33 This may be true as to other contexts as well; if so, then per
haps a clause in a lease executed in the 1930s should be interpreted
more narrowly than one from a lease executed in the 1990s even
though the question in both arises in the 199Os. However, there are
two different issues being discussed: (1) the reasons for shutting-in a
gas well, and (2) the reasons for including a shut-in royalty clause in a
lease. Are they necessarily co-extensive?
A reading of early oil and gas cases coupled with a review of early
forms and commentary suggests that there may have been three
stages 34 in the development of shut-in royalties, or, at the very least,
28. E.g., Frank J. Scurlock, Practical and Legal Problems in Delay Rental and Shut-In Roy
alty Payments, 4 !NSf. ON OIL & GAS L. & TAX'N 17,38-39 (1953); WILLIAMS, supra, note 1,
§ 631, at 395; KUNTZ, supra, note 16, § 46.1, at 2; Leslie Moses, Problems in Connection with
Shut-In Gas Royalty Provisions in Oil and Gas Leases, 23 TULANE L. REV. 374,376 (1949). In
Vernon v. Union Oil Corp., 270 F.2d 441, 446 (5th Cir. 1959), the court observes: "Of course, the
self-interest of lessees was behind the introduction of this particular provision but they had a fair
case for some reasonable measure of protection." Id.
Examples of leases terminating for failure to produce include: Smith v. Sun Oil Co., 135 So.
15 (La. 1931) (1920 lease terminated even though two shallow gas wells on the leasehold might
produce "from half a million to a million feet of gas per day" because "where the output of a gas
well either cannot be, or in fact is not, disposed of, the well cannot be said to be a paying
propoSition either for the owner of the land or for the owner of the well"); Caldwell v. Alton Oil
Co., 108 So. 314 (La. 1926) (lease cancelled because did not produce in paying quantities
although gas well drilled); Elliott v. Crystal Springs Oil Co., 187 P. 692 (Kan. 1920); (lease termi
nates for failure to produce even though gas well of low pressure because could not be con
nected to nearby high pressure pipeline without expensive equipment which would not be
profitable to install).
Some cases do contain early forms where shutting-in is limited to "no market or demand
therefor." E.g., LeLong v. Richardson, 126 So. 2d 819 (La. 1961); Taylor v. Kimbell, 54 So. 2d 1
(La. 1951).
29. For some early examples, see Morriss v. First National Bank. 249 S.W.2d 269 (Tex. Civ.
App. 1952); Shell Oil Co. v. Goodroe, 197 S.W.2d 395 (Tex. Civ. App.1946); Freeman v. Magno
lia Petroleum Co., 171 S.W.2d 339 (Tex. 1943); Risinger v. Arkansas-Louisiana Gas Co., 3 So. 2d
289 (La. 1941); Humble Oil & Refining Co. v. Rankin, 42 So. 2d 414 (Miss. 1949).
30. See the assorted phrases supra text accompanying notes 23-25.
31. Anyway, as I discuss later, I am not fully convinced that the common explanation is
correct, or at least, that there may not be at least two independent lines of development.
32. KUNTZ, supra note 16, § 46.1, at 3 ("gas only" context).
33. Id.
34. Whether the development actually occurred in three stages is not crucial to the main
thesis.
two parallel developments. Under the three-stage scenario, the first

stage was marked by the clauses that required a per-well royalty for
gas when gas was sold or used off the premises. 35 The 1898 case of
Ohio Oil Co. v. Lane 36 involved a suit to recover royalty where the
well had been shut-in since 1891. The court held that the provision for
a fixed sum for gas ($300 per year per gas well) "while the same is
being used off the premises" should not be interpreted to require pay
ment when gas is not so used even if a jury might believe it could have
been so used. The court found support for its decision in the provision
allowing the lessee to use the gas on the premises for drilling addi
tional wells without paying the lessor. Apparently the parties were
after oil,37 and it had become customary to provide in oil leases that if
gas was found instead, the lessee could use it to drill additional oil
wells. However, in Pittsburgh-Columbia Oil & Gas Co. v. Broyles ,38
where gas from six wells could have been produced and, apparently, at
times was produced, the court rejected the idea that the lessee can sit
on the gas and seems to have suggested the implied covenant to mar
ket. According to the court, specific clause wording "must be con
strued in the light of the circumstances surrounding the parties at the
time the agreement was entered into, and the scope and purpose to be
attained thereby."39 The judgment probably was based not so much
on there being a market available as on the allegation that the shut
down was "for the sole purpose of cheating and defrauding appellee
out of the royalty justly due him."4O
Because of the potential unfairness to the lessor as illustrated by
these and other cases,41 the next stage was to convert the former per
35. E.g., Hennessy v. Junction Oil & Gas Co., 182 P. 666 (Okla. 1919) ($100 per year for
each well from which gas was transported); McGraw Oil & Gas Co. v. Kennedy, 64 S.E. 1027
(W. Va. 1909) ($200 per year for each well from which gas is marketed or used off the premises).
U[T]he practice of inserting the shut-in gas royalty clause as a part of the royalty clause
suggests that the once common practice of providing for a fixed gas royalty also forms a part of
the background for the shut-in gas royalty." KUNTZ, supra note 16, § 46.1, at 6 n.ll.
36. 52 N.E. 791, 793 (Ohio 1898).
37. See also the lease form reported in 1956 to be in general use in California containing the
following shut-in royalty clause:
If the lessee shall complete a well or wells on said land which shall fail to produce oil
in paying quantities but which produces gas in paying quantities, the Lessee shall either
sell so much of said gas as it may be able to find a market for, and pay the Lessor the
royalty provided herein ...."
Irving A. Shimer, Constructional and Drafting Problems in Shut-In Royalty Clauses, 3 UCLA L.
REV. 564, 566 (1956) (emphasis added).
38. 91 N.E. 754 (Ind. Ct. App. 1910) ($1000 judgment for lessor affirmed).
39. Id. at 755.
40. Id.
41. See MAURICE H. MERRILL, THE LAW RELATINO TO COVENANTS IMPLIED IN OIL AND
GAS LEASES 224 (2d ed. 1940). VICTOR H. KuLP, OIL AND GAS RIOHTS 604 (1954) (reprinted
from AMERICAN LAW OF PROPERTY (1952» also discusses the problem and describes the
Broyles case as the better view.
There were some cases, for example, McGraw Oil & Gas Co. v. Kennedy, 64 S.E. 1027 (W.
Va. 1909), where the lessee paid the production royalty ($200 per gas well) to the lessor even
though the well was shut-in, apparently to avoid the unfairness claim and any alleged duty to
well royalty clause to a royalty for shut-in wells and then to add a
percentage royalty for gas sold or used. The net result was the form
identified in Curtis M. Oakes, Benoit's Oil and Gas Forms:
To pay lessor for natural gas at the rate of - - Dollars per
annum, payable quarterly for each well producing gas exclusively,
which said royalty shall be paid until such gas shall be used (except
for fuel) or sold, whereupon the royalty of - Dollars per well shall
cease and the royalty payable to the lessor shall be equivalent to
one-eighth of the value of the gas42 so used or sold ....43
Curtis Oakes places this clause in his chapter on special clauses, but in
an earlier chapter he sets forth a series of twenty-five lease forms with
relevant shut-in language in eleven of them. Of these eleven, five con
tain the above language or some variant thereof and without the "in
lieu of production" element that marks the third stage of
development. 44
In the first two stages of the development of the shut-in royalty
clause the focus was on providing fair compensation to the lessor for
market. The court found this maintained the lease. It was no concern of the lessors whether the
well was a producer or not; that was up to the lessee to decide. Of course, switching to a per
centage production royalty eliminated this option. Frank Scurlock describes McGraw and other
similar decisions as rewriting the leases. Scurlock, supra note 28, at 39-40.
42. Cf. Lamczyk v. Allen, 134 N.E.2d 753 (Ill. 1956) (royalty clause provided $150 per well
when gas was sold or used off the premises, but only $50 per well when not sold or used).
43. CURTIS M. OAKES, BENOiT's OIL AND GAS FORMS, FORM 49, at 156 (2d ed. 1939). In
the chapter on special clauses in leases, Oakes sets forth seven examples of gas royalty clauses,
five of which contain no relevant shut-in language. Forms 47, 48, 50, 51, & 52. lWo clauses,
however, forms 46 and 49, do contain relevant shut-in language.
While the clause does not contain the term "shut-in" to describe the royalty, neither does
the third-stage clause set forth at infra note 47. Thus the absence of the term should not confuse
what the royalty is being paid on.
Several cases involve the switching point from the shut-in rate to the production rate. In
Mitchell Energy Corp. v. Blakely, 560 S.W.2d 740 (Tex. Civ. App. 1978), the question was
whether sale of gas from B well to Grace Drilling for drilling D well was a "sale" within the
royalty provision. The court held it was not because it came within the free-use provision and
therefore shut-in rather than production royalty still held the lease. In Melancon v. Texas Co.,
89 So. 2d 135 (La. 1956), the court held that payment of shut-in royalties will not hold the lease
where production royalties are due. Accord Bollinger v. Texas Co., 95 So. 2d 132 (La. 1957)
(payment of shut-in royalties did not preserve lease even though larger than the production
royalties that were due). Switching also makes it necessary to clarify which year is covered by
the payment. See Phillips Petroleum Co. v. Harnly, 348 S.W.2d 856 (Tex. Civ. App. 1961). In
Acquisitions, Inc. v. Frontier Explorations, Inc., 432 So. 2d 1095 (La. Ct. App. 1983), shut-in
royalties were 14 months behind but as royalties notice was due and lessee had 30 days within
which to pay. The continuation of the lease was dependent on wells being shut-in rather than on
payment of the shut-in royalties, although it is unclear whether the court relies on that reason
rather than the rationale that they are royalties rather than rentals.
44. In what OAKES, supra note 43, identifies as the form "frequently used" in Arkansas, id.
at 31, the following clause is included: "To pay to lessor at the rate of lWo Hundred ($200.00)
Dollars per year, payable quarterly, for each well producing gas ... While such gas is not being
utilized or sold off the premises, whether before pipe line connection or during subsequent sus
pensions of withdrawal ...." Id. at 32. It is also found in a form Oakes identifies as "in common
use in Louisiana," id. at 75 (form at 76), and in the Louisiana Revised Form, id. at 84 (form at
86). A form Oakes identifies as in "general current use" in Ohio and Pennsylvania (111) in
cludes the language: "In case there is no purchaser or market in the vicinity for the gas produced
under this grant, then the grantor agrees to accept-Dollars quarterly in advance until a market
for the gas is found, after which the full royalty payment for the gas shall be made as hereinbe
fore provided." (113). Somewhat similar language is in another form listed as "of common use"
in Ohio and Pennsylvania, id. at 115 (form at 117) (no reference to vicinity).
the gas and not on preventing the lease from expiring due to the lack
of a market. In fact, for some time the lack of a market was not
viewed as a problem for the lessee: "If, in the production of gas, no
pipe line or market is immediately available, the well may be shut-in
awaiting such market; in that event the operator can hold the lease by
mere discovery of gas rather than by actual production. "45 When it
became clear that this rule would not apply in every jurisdiction,46 it
became necessary for lessees to find some way to protect themselves.
The third stage occurred when the shut-in royalty provision was
coupled with the in-lieu of production provision as in this example:
[A]nd shall pay the lessor the sum of Fifty Dollars ($50...) each
year as royalty on each gas well where gas only is found and same is
not used or sold and while said royalty is so paid said well shall be
held to be a producing well under the term paragraph hereof, being
paragraph Number _.47
Six of the lease forms in Oakes contain this in-lieu of production lan
guage or language similar to it.48 The only significant variation be
45. SAMUEL H. GLASSMIRE, LAW OF OIL AND GAS LEASES AND ROYALTIES 196 (1935).
The author cites cases from Oklahoma, Montana and West Virginia, however, he does not cite to
the cases listed in note 28 supra even though all of them are pre-1935.
Robert T. Donley, writing in 1933, says that a provision to pay for gas used or sold off the
premises implies that no payment is due when it is not so sold or used. He does not discuss any
clauses that require payment in the latter situation. Robert T. Donley, The Right of a Lessee to
Discontinue the Payment of Rentals When the Product of a Gas Well Cannot be Utilized Off the
Premises, 40 W. VA. LQ. 68 (1933). While noting that some lessees may have tried to deal with
the lack of a market by resuming payment of delay rentals When shutting-in a gas well, he too
maintains that nothing should be due during the primary term and that the implied covenant
should give a reasonable time after expiration of the primary term to find a market (he suggests
one year).
46. See supra note 28.
47. OAKES, supra note 43, at 155. The origin of the coupling appears to be the Mid-Conti
nent-Producers 88 form drafted in the 19205. It is published in RICHARD LEROY BENOIT,
CYCLOPEDIA OF OIL AND GAS FORMS 12-17 (1926). The shut-in royalty clause is found in para
graph four of the lease. Id. at 13. Benoit does not indicate how long before the publication of
the book in 1926 the clause was drafted. GLASSMIRE, supra note 45, while not containing a
discrete discussion of shut-in royalties, contains lease forms including such clauses. Three of his
four lease forms contain shut-in royalty clauses. E.g., "and where not sold shall pay Fifty Dollars
($50.00) per annum as royalty from each such well, and while such royalty is so paid such well
shall be held to be a producing well under paragraph numbered two hereof." Id. at 330 (first
form) (nothing in second form), id. at 339 (third form same as first except "not used or sold"), id.
at 344 (fourth form same as first).
48. In what OAKES, supra note 43, identifies as a Producers' 88 Standard Revised lease "in
eneral current use in the Midcontinent Area," id. at 22, the gas royalty clause contains this
ge: "and where not sold shall pay Fifty Dollars ($50.00) per annum as royalty from each
well, and while such royalty is so paid such well shall be held to be a producing well under
paragraph numbered two hereof." Id. at 23. Except for changes in a few words, this basic clause
also appears in what the author identifies as a form "also in common use in Louisiana." Id. at 79
(form at 80) ("not sold or used" and "may pay") and in the Louisiana Special Form (93) (form at
94-95) ("not sold or used" and "may pay" and $100 per well». In addition, it appears in a form
identified as "popular in Texas," id. at 119 (form at 120). ("not sold or used" and "may pay") and
in a form "also popular" in Thxas, id. at 126, (form at 127) ("may pay") and in a form labeled
Texas Special Form, id. at 131 (form at 133) ($100).
Because OAKES contains five forms with stage-one and stage-two development only and six
forms with stage-three development, it may be that the development was parallel rather than in
stages.
tween these clauses seems to be that some provided that the royalty
"shall be" paid while others provide that it "may be" paid. 49
Steven v. Potlatch Oil & Refining Co. ,50 decided in 1927, may
have provided the impetus for widespread adoption of the clause in
this coupled form. Steven involved a lease executed in 1921 that con
tained the clause: "except that during the time that any such gas shall
be 'shut-in' by reason of there being no profitable market for its out
put, there shall be no royalty."51 Although this clause does not con
tain the now fairly standard "in-lieu of production language," the
court interprets the provision as if it did. The action to cancel the
lease was brought shortly after the primary term ended. 52 The court
observed that the well was in wild-cat country, and "[s]uch a construc
tion [to forfeit the lease when there is no market] would violate the
spirit if not the very letter of the contract."53
However, the courts could not be counted on to read this "in-lieu
of production" language into every lease that provided for a shut-in
royalty. A good illustration, although a much later case, is Navajo
Tribe v. United States. 54 In Navajo Tribe the court holds that the shut
in provision "did not go on to provide for automatic termination of
gas rights in the event of failure to pay."55 Navajo Tribe involved a
1923 lease with the following language:
Failure on the part of the lessee to use a gas-producing well
which cannot profitably be utilized at the rate herein named shall
not work a forfeiture of this lease so far as it relates to mining oil,
but if the lessee desires to retain gas-producing privileges, he shall
pay a rental of $100.00 per annum in advance, calculated from the
date of the discovery of gas on each gas-producing well, the gas
from which is not marketed nor utilized other than for operations
under this lease. 56
The court's interpretation, however, is open to criticism because the
court did not consider the "desires to retain" phrase, which might be
argued to state an implied condition. Furthermore, the court appears
to be interpreting the 1923 lease by 1966 drafting standards.
49. This difference is discussed infra notes 97-118.

50. 260 P. 119 (Mont. 1927).
51. Potlatch, 260 P. at 120. The court discusses how wise this provision is in the context of
needing time to fully develop and find a market.
52. The lease was dated April 16, 1921; it was for a five-year primary term plus a secondary
term based on production. The suit to cancel was brought on July 30, 1926, so the five-year
primary term had run.
53. 260 P. at 123. Although if Montana is a discovery jurisdiction, the decision could have
been justified on the basis that a reasonable time for marketing had not expired. Due diligence
seems to have been exhibited.
54. 364 F.2d 320, 329 (Ct. Cl. 1966).
55. The court distinguishes this case from Freeman v. Magnolia Petroleum Co., 171 S.W.2d
339 (Tex. 1943) (noted supra note 29, on this basis).
56. Navajo Tribe, 364 F.2d at 328.
Supposing that the foregoing three-stage development theory of

the shut-in royalty clause is correct, what bearing. if any, should it
have on the interpretation of a shut-in royalty clause to determine the
permissible reasons for shutting-in? First, what it appears that the text
writers and courts have in mind when they write about the shut-in
royalty clause having been developed in the 1930s is the development
that coupled57 the shut-in royalty with the "in-lieu of production" lan
guage. This development prevented the termination of the lease due
to lack of production at the expiration of the primary term.58 Second,
while at first blush the first two stages of development might seem to
reinforce the Kansas Supreme Court's view in favor of the lessor be
cause of the clear effort in these developments to provide fair com
pensation for the lessor, they are more accurately read for the
principle that the shut-in royalty was not invented to allow the lessee
to shut-in, it was invented to provide a benefit to the lessor when the
lessee shut-in. 59 This history of the clause addresses the question of
why the shut-in royalty clause is in the lease, not the question of why
gas wells are shut-in.
If, as the old cases and early writers suggest and as we know to be
true today, discovery jurisdictions allow a lessee a reasonable time in
which to market, why did shut-in royalty provisions become common
in those jurisdictions? I suggest they became common to provide
compensation to the lessor at a time when there might be no other
compensation. In other words, the force of the bonus, if there was
one, is spent; the delay rental has ceased because efforts at production
have begun and generally it will reattach only if a dry hole is drilled,
and a shut-in well is not a dry hole. Production royalties do not arise
until there is marketing, but that may be as many as five or ten years
down the road60 while in the meantime the lessor is receiving noth
ing.61 But why would the additional "in-lieu of production" language
57. I say "coupled" to allow for the parallel development theme; under the three·stage sce
nario, the proper word would be "added." Anyway, the "in-lieu of production" language was
not added in every instance.
58. See supra note 28 and accompanying text.
59. Of course, it may be perfectly proper to characterize it as Kuntz did in 1972: "for the
purpose of providing a minimum royalty to assuage the lessor and thereby render him more
tolerant toward delays in marketing the gas." Eugene Kuntz, 41 Oil & Gas Rep. 553, 555 (1972).
60. E.g., Bristol v. Colorado Oil & Gas Corp., 225 F.2d 894 (10th Cir. 1955) (involving
Oklahoma property, the court affirmed denial of cancellation even though nine and one half
years passed before marketing gas from a well in wildcat territory; the dissent believed that was
too long); Pray v. Premier Petroleum, Inc., 662 P.2d 255, 259 (Kan. 1983) (over seven years).
61. However after the shut-in royalty clause was developed, the criticism shifted quickly
from the lessor getting nothing to getting too little. Thus, Scurlock, supra note 28, identifies and
discusses what became problems with early forms of the shut-in royalty clause. The first issue he
addresses is balancing the interests of the lessor and the lessee:
[T]he usual ... clause provides only for a small annual payment per well, regard
less of the size of the tract leased, and would allow for an unlimited extension of a lease
based on such small annual payments under some circumstances. To correct this situa
tion, it is important for the lessor that such clause provide for an amount to be paid him
be added when production only required discovery in those jurisdic

tions? One easy answer is that it was not certain which states were
discovery jurisdictions; at least at some time in the past, some people
thought every jurisdiction was a discovery jurisdiction.62
Over time, various authors have discussed the reasons for having
shut-in royalty clauses in discovery jurisdictions. Most recently in Da
vis v. Cramer,63 the Colorado Court of Appeals recognized and set
forth the reasons noted by Eugene Kuntz. As summarized by the
court, they are: (1) to provide an additional special limitation; (2) to
prevent forfeiture for failure of lessee to exercise diligence in market
ing; (3) to extend the reasonable time within which the lessee is re
quired to market the product; (4) to remove doubt regarding the time
within which marketing must be accomplished; or (5) to compensate
the lessor for delay.64 Reasons (1) and (5) reflect the interests of the
lessor and reasons (2), (3) and (4) reflect the interests of the lessee.
Several of these purposes may require specific language to
implement.65
Although the shut-in royalty clause language noted earlier66 in
cludes several reasons for shutting-in wells, those reasons need to be
considered explicitly in the context of the lessor-lessee relationship
because of the Kansas Supreme Court's narrow view of what is benefi
cial to both lessor and lessee. The overall purpose of the relationship
is the development of the gas in the leased land. The lessor usually
cannot develop and, therefore, wants someone else to do it, most
in keeping with the number of acres to be included in the lease; and, at the same time,
that the period provided for such extension be limited. A seemingly intelligent han
dling ... was that ... in ... Vance v. Harley, 41 So. 2d 724 (La. 1949), where the shut-in
gas royalty contracted for was $2,000 per well per year, with the added proviso that an
extension in that manner could not exceed three years. Many leases now gear those
royalty payments to the delay rental payments. An individual adjustment is desired in
each case.
[d. at 4l.
62. See supra note 45 and accompanying text.
63. 837 P.2d 218 (Colo. App. 1992).
64. Citing 5 EUGENE KUNTZ, OIL AND GAS § 46.1 (D. Dunn ed. 1989). In 1972, Kuntz
listed four reasons for using a shut-in royalty clause in a discovery jurisdiction:
(1) to hedge against the possible overruling of the holding that marketing of gas
is not required to satisfy the habendum clause;
(2) to overcome the effect of the established rule by inserting an additional spe
cial limitation which requires the current payment of shut-in gas royalty in order to
prevent a termination of the lease if gas is not marketed [however he says the clause is
not usually drafted so as to make the payment a pre-condition];
(3) to remove uncertainty as to what constitutes a reasonable time within which
marketing must be commenced to comply with the implied covenant to market [could
place an outside time limit; or could postpone diligence for a set time]; and
(4) for the purpose of providing a minimum royalty to assuage the lessor and
thereby render him more tolerant toward delays in marketing the gas.
Eugene Kuntz, 41 Oil & Gas Rep. 553, 553-55 (1972).
65. This is the focus of the next two subsections of this Part.
66. See supra text accompanying notes 23-25.
762 Washburn Law lournal [Vol. 33
likely as quickly and as remuneratively as possible.67 The lessee (put

ting aside the lease-hound) usually is in the development business and
supposedly needs the lease to keep the business going, although the
lessee may want to build up a reserve. Regardless, the lessee likely
will not undertake the lease without some guarantees that once the
lessee begins to spend money in the development process that invest
ment will be protected.68 When will a lessee who has spent money on
a gas well and is interested in making a profit shut-in the well? The
apparent primary reason for shutting-in was noted earlier-the lack of
a market for the gas.
While it is common to refer to "no market" or to a "lack of mar
ket" as the reason for shutting-in, it is quite clear that the reference
can encompass at least five different situations: (1) lack of demand
for gas; (2) lack of a pipeline to reach whatever market may exist;69
(3) gas at too Iowa pressure to enter the existing pipeline;70 (4) a
problem with the quality of the gas, such as being sour;71 and (5) lack
67. Wallace Malone, in discussing achieving a balance between lessor and lessee, noted on
the one hand that the lessor gets nothing if gas is not produced and probably is not particularly
interested that the gas may be saved for his heirs to enjoy and on the other hand that the lessee
has spent a lot of money and wants to profit from it. Wallace Gordon Malone, The Evolution of
Shut·In Royalty Law, 11 BAYLOR L. REv. 19,21 (1959).
68. Pray v. Premier Petroleum, Inc., 662 P.2d 255, 257 (Kan. 1983) ("Absent the shut-in
royalty provision venture capital to explore for gas in new areas, known as wildcatting, would
not be available. The future supply of gas is dependent upon this risky and expensive business").
69. When the lessee is operating in wildcat territory, almost by definition no means of trans
porting any gas that may be discovered exists; a well would have to be prolific indeed to entice
someone to build a pipeline after only the first well is brought in. Numerous cases exist where
the lessee has needed to implement a program of development before a gas purchaser could be
enticed to build a pipeline. One of the earliest discussions appears in Steven v. Potlatch Oil &
Refining Co., 260 P. 119 (Mont. 1927), pointing out how wise it is to have a provision that gives
the lessee the time to do this. In Pray v. Premier Petroleum, Inc., 662 P.2d 255, 258 (Kan. 1983),
efforts to market were fruitless because there was only one gas well and it was three miles from
the pipeline. The action was filed on the theory that the "gas well was not capable of producing
in paying quantities because the cost of connecting to the pipeline rendered it unprofitable." Id.
at 257. The trial court agreed. The Supreme Court disagreed: "Frequently, the lessee discovers
gas in paying quantities, but because of no pipeline in the vicinity has no market and is unable to
produce the gas." Id. The testimony was that the pipeline would cost about $80,000 and com
pression equipment about $118,000. Without considering these costs, the well would net the
working interest a profit of $134,000 annually, if the gas could be sold. The court concluded the
pipeline and compressor costs should not be considered in determining whether the well could
produce in paying quantities, first, because they were not normal (85 percent of the time pur
chaser brings in the pipeline) and, second, it would negate the effectiveness of the shut-in royalty
clause.
But even if there is a pipeline close by; it will not be next to the well and, therefore, there
will always be some delay in making a connection.
70. E.g., Elliott v. Crystal Springs Oil Co., 187 P. 692 (Kan. 1920) (lease terminated for
failure to produce; gas well of low pressure could not be connected to nearby high pressure
pipeline without expensive equipment which would not be profitable to install). Contra Shell
Oil Co. v. Goodroe, 197 S.W.2d 395 (Tex. eiv. App. 1946) (lease did not terminate when pres
sure went below what was needed to feed the one pipeline because lessor was accepting shut-in
roy-alty). In Goodroe the court appears to treat payment of shut-royalties as the "resumption of
dnlling or mining operations" under a ninety-day cessation clause. See supra note 69 (discussion
of Pray v. Premier Petroleum, Inc., 662 P.2d 255, 258 (Kan. 1983». See also Moses, supra note 2,
at 376: "A low pressure well, even though capable of producing an enormous quantity of gas,
may not be a commercial producer." Id.
71. See Risinger v. Arkansas-Louisiana Gas Co., 3 So. 2d 289 (La. 1941). Risinger involved
a 1931 lease of eighty acres for a five-year primary term, which was renewed in 1936 with a shut
of a sufficient quantity.72 Each of these situations at one time or an

other led a court to conclude that there was a "lack of market" for the
gas.
A second reason for shutting-in the gas well may be to make a
better sale than the one that is available first. Gazin v. Pan American
Petroleum Corporation,73 contains a good illustration of why the exist
ence of a "limited market" by itself should not be determinative:
In the present case, the lessee would not have been required to
have expended any more than a nominal sum of money in order to
have marketed the gas under a contract with Oklahoma Natural
Gas Company ... whose line was less than one mile from the well.
However, the contract which Oklahoma Natural proposed to make
with lessees at all times up to April 1, 1960 [well completed October
1956], provided that Oklahoma Natural would purchase gas "as and
when needed and required" by Oklahoma Natural, with an initial
price of ten cents per thousand cubic feet and with an escalator
clause that would have raised the price to only eleven cents at the
time of trial. Defendants knew from their own experience and that
of other producers in the area that Oklahoma Natural was purchas
ing only a minimal amount of gas under such contracts, since there
was no obligation to purchase any set amount.
Shortly after the completion of the well, the lessees contacted
another potential purchaser, Cities Service Gas Company, whose
line was approximately eighteen miles from the well. Cities Service
would not negotiate a contract until such time as defendants could
establish reserves in excess of forty billion cubic feet of gas. De
fendants continued negotiations with Oklahoma Natural and re
ceived the promise of a much more favorable contract calling for an
initial price of fifteen cents per thousand cubic feet of gas and obli
gating Oklahoma Natural to take or pay for five percent of the
reserves established for each well each year, if defendants could
dedicate an eight-township area with reserves amounting to forty
billion cubic feet of gas under such contract.
The defendants participated in drilling, drilled, and re-worked a
number of wells in the area and acquired additional acreage at con
siderable expense. They continued to negotiate with Oklahoma
Natural and finally Oklahoma Natural lowered its demand under
such a contract to an establishment of reserves of only twenty bil
lion cubic feet of gas in a dedicated area of eight townships.
in royalty clause. The lessee could not produce because with one well it would not be profitable
to remove the salt water. However, if other wells were developed in the area, removing the salt
water would be cost effective. "Capable of producing" seems to mean "capable of producing a
marketable product under the right conditions." The well's capacity to produce was not a pre
condition to the continued existence of the lease. The lower court's judgment for plaintiffs to
cancel the lease was reversed and the complaint was dismissed. See also infra notes 127-134 and
accompanying text.
72. E.g., Davis v. Laster, 138 So. 2d 558 (La. 1992) (nine dry holes drilled in effort to find
more gas; eventually joined with another operator); LeLong v. Richardson, 126 So. 2d 819 (La.
Ct. App. 1961).
The reasons may interrelate so that a lack of quantity may delay building of the pipeline.
See supra note 69.
73. 367 P.2d 1010 (Okla. 1962).
Defendants established the twenty billion cubic feet of reserves

in January 1960. Details of the contract were worked out between
defendants and Oklahoma Natural and the contract was signed on
April 1, 1960.14
If a lessee can take four years to bargain for a better contract with the
prospective first purchaser, the lessee should be able to delay produc
tion to secure a better deal with a second prospective purchaser. The
key to what happened in Gazin is that there was a real opportunity at
hand for better marketing, not a holding-out to speculate75 on the
hope and prayer that something better would come along. However,
according to the Kansas Supreme Court, not all speculation is bad:
"A case such as the one at bar, on the other hand, necessarily involves
some speculation. This speculation should not include the cost of tak
ing the gas to market when the parties have foreseen in the lease the
possibility a market might not exist."76
A third reason for shutting-in is because government regulation
requires it.77 While the force-majeure clause may protect the lease for
the lessee in this circumstance, that clause does not provide any in
come for the lessor.
A fourth reason for shutting-in is because of operational
problems, such as mechanical failures. 78 While the operations or con
tinuous operations clause may protect the lease for the lessee, these
clauses do not provide any income for the lessor. However, the les
sor's interest is protected to some extent in that these clauses are
time-limited, for example to sixty or ninety days of doing nothing.
However, the frequency with which the lessee can invoke these
clauses might not be limited.
If the courts no longer recognize the early West Virginia view that
the reason for a lessee shutting-in was of no concern to the lessor, and
they want to make sure that the lessee has a "legitimate" reason for
shutting-in in the absence of specification in the clause, is there some
standard other than the Kansas "original purpose" standard that a
court might apply? One obvious suggestion is the prudent operator
standard. Indeed the Supreme Court of Kansas referred to this stan
74. [d. at 1012-13.

75. See Collins v. Mt. Pleasant Oil & Gas Co., 118 P. 54 (Kan. 1911), as an example of a
lessee not being able to hold a lease for speculative purposes. To James Sandlin, wanting to
avoid Federal Power Commission jurisdiction would not justify shutting-in; nor would competi
tion with the pipeline company in other fields. He suggested that whenever there is a market
available, the payment of shut-in royalties would not be accepted by courts as a sufficient excuse
for not marketing. Sandlin, supra note 11, at 114-15.
76. Pray v. Premier Petroleum, Inc., 662 P.2d 255, 259 (Kan. 1983).
77. See the shut-in royalty clause excerpts in the fourth category at supra notes 24-25 and
accompanying text. See also Hydrocarbon Management, Inc. v. Thacker Exploration, Inc., 861
S.W. 2d 427 (lex. Civ. App. 1993). With declining federal regulation of gas, this reason has
become less important.
78. Although an oil well case, for a recent example, see Smith v. Duncan, 595 N.E.2d 645
(Ill. App. Ct. 1992).
dard when pointing out that the implied covenant to market continues
to apply.79 Under this standard the court answers the question:
Would the reasonable prudent operator shut-in the well under these
circumstances? Of course under this standard the courts consider the
interests of both the lessor and the lessee. In Tucker the Kansas
Supreme Court decided that shutting-in a well provided no benefit to
lessor except in the no-market situation, thus perhaps already apply
ing the prudent operator standard. If so, is the court correct? Three
other reasons for shutting-in have been noted above. Do any of them
provide a benefit to the lessor?
The lessee in Tucker shut-in production primarily to obtain a bet
ter market. Obviously if there are two purchasers available and the
lessee chooses the purchaser who offers more money, and if lessor's
royalty is based on a percentage of proceeds, the lessor benefits from
a higher return. Indeed, if the lessee did not choose that purchaser,
the lessor might argue a breach of the implied duty to market. Mau
rice Merrill noted as early as 1940 that: "The covenant is to market
within a reasonable time. The concept of diligence should include the
duty to realize the highest price obtainable by the exercise of reason
able effort."80 Clearly there has been some movement toward a duty
to obtain the best price. 81 The Texas Supreme Court has asserted
flatly that the rule is: "the lessee must market the production with
due diligence and obtain the best price reasonably possible."82 Can it
be that there is no such duty in Kansas? If there is, however, the
decision in Tucker has gone a long way in putting the lessee on the
horns of a dilemma. Of course, if one views as the preferred option
for the lessor that the lease be forfeited so that the lessor might realize
a gain from leasing to someone else, the Kansas rule might work in
the initial case. However, it is not likely to work in subsequent cases,
for knowledgeable lessees will accept the poorer market offer. The
issue then becomes whether both purchasers have to be immediately
available or to what extent a reasonable search should be tolerated.
Here the earlier discussion of Gazin v. Pan American Petroleum Cor
poration,83 where a four-year period of negotiation and improvement
occurred, becomes relevant. Furthermore, even if lessor's royalty was
based on market value rather than proceeds, if the lessee must accept
79. See language quoted supra text accompanying note 19.

80. MERRILL, supra note 41, at 212·13 (citing Livingston Oil Corp. v. Waggoner, 273 S.W.
903 (1925».
81. Amoco Production Co. v. First Baptist Church, 579 S.W.2d 280 (Tex. Civ. App. 1979).
See also Gazin v. American Petroleum Corp., 367 P.2d 1010 (Okla. 1962) (discussed supra notes
73-75).
82. Cabot Corp. v. Brown, 754 S.W.2d 104, 106 (Tex. 1988). See also HEMINGWAY, supra
note 20.
83. 367 P.2d 1010 (Okla. 1%2) (discussed supra notes 73-75).
the limited market then available, lessor should not be able to argue
then or later that the price no longer reflects market value.
While governmental regulation or operational problems may mo
tivate a lessee to shut-in a gas well, the lessee is, in all likelihood,
already privileged to do so under another clause. What application of
the shut-in royalty clause does in those instances is to provide com
pensation to the lessor during the shut-in period. In P.M. Drilling,
Inc. v. Grove,84 the court interprets the term "shut-in" in the shut-in
royalty clause to mean "'closed down temporarily for repairs, cleaning
out, building up pressure, lack of market, etc.' "85
The good-faith business-judgment standard is a second standard
to consider as a substitute for the Kansas "original purpose" standard.
John Lowe, for example, has proposed a good faith test:
Some shut-in royalty clauses are specifically limited to lack of a
market. If the clause's language does not limit its use-by referring
to lack of market or pipeline connections, for example-the clause
has been held applicable whatever the cause of the shut-in so long
as the lessee acts for a good faith business purpose. 86
Here the focus really is more on the lessee's action itself than on the
balancing of benefits between lessor and lessee. Again, this is not an
unknown standard in oil and gas law. 8 ?
If one of these two substitute standards for permissible shutting
in is coupled with application of the implied covenants,88 the chances
for wrongful conduct by the lessee are narrowed considerably. Thus
the lessor may be protected sufficiently without adopting the Kansas
"original purpose" standard. However, there will still be the lessee
who shuts-in a dry hole in an effort to maintain the lease on the hope
that some day a producible quantity of something will be discovered.89
B. Should the Permissible Reasons for Exercising the Shut-in

Royalty Clause be Identified in the Clause?
Should the shut-in royalty clause identify within the clause those
reasons why the lessee might shut-in a gas well? Of course, the an
swer is clear in Kansas: Yes, if the lessee is interested in shutting
down for reasons other than: (1) no market at all and (2) those per
mitted under other lease provisions, such as force majeure; yes, if the
lessor is interested in having compensation when shutting-in is permit
84. 792 S.W.2d 717 (Tenn. Ct. App. 1990).
85. Id. at 723, quoting 8 HOWARD R. WILLIAMS & CHARLES J. MEYERS, OIL AND GAS LAW
909 (1987).
86. LoWE, supra note 18, at 266·67.
87. A good recent discussion of the prudent operator rule as compared with the good-faith
business·judgment rule is found in Kramer & Pearson, supra note 11, at 811·22.
88. Implied covenants, particularly the implied covenant to market, are discussed infra
notes 150-169, Part III (A).
89. See Kidd v. Hoggett, 331 S.W.2d 515 (Tex. Civ. App. 1959).
1994] Shutting~in 767
ted by the lease for reasons other than no market at all (for example
force majeure). In addition, there is always the risk that another state
will emulate Kansas, but if not, the appropriate question is: What is
the purpose of drafting? Can it be anything other than to explicate as
fully as possible the agreement of the parties? Furthermore, extant
lease forms contain many limitations on the scope of the clause, so a
part of the drafting or form-review process should identify those limi
tations and consider specifically whether they are desired.
Frank J. Scurlock, writing in 1953, took the position that:
[I]t would seem the better part of wisdom for the lessor and the
lessee, whenever possible, to execute their contract keeping in mind
the possibility of obtaining gas production from the leased premises
at a time when there was no market or demand for the gas, and
setting forth in detail the incidents attendant upon the happening of
such a contingency.90
Compare Scurlock's view with that of John Kolb writing in 1955, who
after noting no reference to any lack of market in the shut-in royalty
clauses from the cases that he discussed, concluded that "such limiting
words would not appear to be desirable."91 Thus, early on we find an
apparent difference of opinion on drafting strategy. However, Kolb's
objection may be to specifying only one reason, and it may be that
Scurlock would not have limited the clause to one reason.
Professor Reed Dickerson, the noted authority on drafting, iden
tifies the purpose of a legal instrument as "both (1) a crystallization
and declaration of rights, privileges, duties, and legal relationships and
(2) a communication."92 To whom does the instrument communicate?
"For most documents, legislative or private, the initial user is a lay
man. He expects to find in the document a statement of a solution for
the problem that he, as a layman, has encountered, or a statement of a
process that is available to him ... in getting something done."93 Thus
drafting theory would seem to agree with Scurlock's view of "setting
forth in detail the incidents attendant upon the happening of such a
contingency." However, drafting today will not solve every potential
problem. The drafter will not anticipate everything. Furthermore, we
have Richard Maxwell's admonition made back in 1964: "There is ap
parently no crevice left by the draftsman too small to constitute at
90. Scurlock, supra note 28, at 55. Leslie Moses, writing in 1949, after discussing problems
associated with previOUsly drafted shut-in royalty clauses noted "the majority of shut-in royalty
clauses seem to have been prepared without giving adequate consideration to the contingencies
which should be covered." Moses, supra note 2, at 379-80.
91. John E. Kolb, Problems Arising in the Payment of Shut-In Gas Well Royalty in Texas, 2
So. TEX. L.J. 62, 68 (1955).
92. REED DICKERSON, THE FUNDAMENTALS OF DRAFTING 18 (1965), as quoted in REED
DICKERSON, MATERIALS ON LEGAL DRAFTING 19 (1981).
93. Maurice B. Kirk, Remarks Made at Conference of Experts in Clear Legal Drafting,
National Center for Administrative Justice, Washington, D.C., June 2,1978, as quoted in REED
DICKERSON, MATERIALS ON LEGAL DRAFTING 20 (1981).
least a sporting opening for the advocate if enough is at stake."94 But

the real value of careful and detailed drafting is explicated by the
cases discussed in the next section.
While it might be desirable and appropriate to provide for flexi
bility in a document in order to deal with unforeseen circumstances, it
is never justifiable to be obscure where the avoidable obscurity will
foreseeably require clarification by the taxpayer-supported courts.
Therefore, when reasons for the exercise of a particular option (here
shutting-in a well) are known to exist, there is no valid reason for not
including them in the document. Flexibility, if desired, would be pro
vided by other means, for example, implicating the ejusdem generis
doctrine. Thus, Williams takes the position that if reasons are referred
to in the clause, the clause should contain the additional language:
"lessee's good faith judgment that it is unadvisable to produce and sell
such products for the time being. "95 This brings us to the next section.
C. What Form Should the Expression of Reasons in the Shut-in
Royalty Clause Take?
Because shut-in royalty clauses have included a variety of reasons

over the years and several cases have interpreted those clauses, the
cases will be instructive as to problems encountered and, therefore,
problems to be overcome through drafting. The first subsection below
explores those problems. Because a shut-in royalty clause involves
other issues than the reasons for its exercise and length of time a well
may be shut-in,96 this paper, which does not deal with those other is
sues, will not offer a draft of a complete shut-in royalty clause. In
94. Richard C. Maxwell, Termination of Oil & Gas Leases-The Failure of Drafting Solu
tions, 15 INST. ON OIL & GAS LAW & TAX'N 181, 194-95 (1964), recently called to our attention
in the shut-in royalty clause context by Lowe, supra note 10, at 18-40. Perhaps a good example
of this is Union Oil Company v. Ogden, 278 S.W.2d 246, 247 (Tex. Civ. App. 1955), involving
interpretation of a shut-in royalty clause that provided:
If, while this lease is in effect, oil or gas be discovered on said land which cannot be
profitably produced for lack of a market at the well or wells, Lessee may pay to Lessor
$100.00 as royalty for each such well, on or before the first day of January of each year
after production thereof ceases for lack ofa market, until the production thereof can be
profitably marketed by Lessee, and while such royalty is so paid, such well or wells shall
be considered as producing in commercial quantities for all purposes hereunder.
The court held that the italicized language did not require that the leasehold once produced and
then ceased production, as "it would be a narrow construction indeed which would deny the
right to pay royalty because there had been no production and therefore production could not
have ceased." Id. at 248. The court emphasized construing the instrument as a whole, although
its effort to do so may not be the most defensible. A more traditional approach would have been
to note that the introductory phraseology which sets up the right speaks only of discovering
unmarketable oil or gas and the cessation language does not appear except in a secondary clause
that deals with the time of payment. The primary language should prevail. The main point,
however, is that the argument had to be litigated.
See also Malone, supra note 67, at 21 (1959), who seems to suggest that there cannot be a
uniform clause "since the problem has different ramifications in each case."
95. WILLIAMS, supra note I, § 632.4, at 413, citing Johnson v. Phinney, 287 F.2d 544 (5th
Cir. 1961).
96. See the categorization by WILLIAMS, supra note I, in the text at notes 4-8.
stead, the second subsection below suggests language that can express
the pennissible reasons for shutting-in a well, in light of the problems
discussed in the first subsection. Thus it provides a check-list and lan
guage choices a drafter can select depending on which of the reasons
the parties to a lease want to trigger the clause.
1. Problems that have Arisen Either as to the Reason for Including
the Shut-in Royalty Clause in the Lease or as to Reasons
for Shutting-in
a. Creation of a Special Limitation and the Obligation to Pay

One of the reasons recognized by Kuntz for including a shut-in
royalty clause in a discovery jurisdiction is to provide an additional
speciallirnitation. Not only have questions concerning the creation of
a special limitation been litigated, but in five of the cases discussed
below, the leases with shut-in wells were continued in force without
the lessors apparently being able to collect any payments.
In Davis v. Cramer,97 the shut-in royalty clause provided: "when
no reasonable or convenient gas market is available, lessee may pay
one dollar per acre per annum for the total acres allotted to each
while held as a shut-in well." The well was shut-in in 1972 and the
pipeline connection was not made until 1978. The lessee did not pay
shut-in royalties and the lessor claimed forfeiture of the lease. The
court noted that these events took place during the primary tenn so
that the clause was not needed as a substitute for production for ha
bendum clause purposes. It concluded that the clause did not create a
special limitation in the primary tenn. Of importance to the court
were the facts that the payment was optional, as indicated by "may
pay," and that it was added as a separate paragraph to the royalty
clause. The court in Sohio Petroleum Co. v. S. & P. R.R.98 reached the
same conclusion, but in Sohio Petroleum the shut-in royalty clause in
97. 837 P.2d 218, 223-24 (Colo. Ct. App. 1992).

98. 62 So. 2d 615, appeal dismissed sub nom. Arender v. Kingwood Oil Co., 364 U.S. 802
(1953). In Bennett v. Sinclair Oil and Gas Company, 275 F. Supp. 886 (1967), affd, 405 F.2d
1005 (5th Cir. 1968), the court also made it explicit that the only purpose to be served by the
shut-in royalty clause in the lease at issue was to provide for constructive production. Thus,
where, as in Bennett, actual production exists, constructive production is not needed, and, there
fore, there is no obligation to pay shut-in royalties. The shut-in royalty clause provided:
Where gas from a well producing gas only is not sold or used because of no market
or demand therefor, lessee may pay as royalty $50.00 per well per year, payable quar
terly, and upon such payment it will be considered that gas is being produced within the
meaning of Article 2 of this contract.
Bennett, 275 F. Supp. at 889.
The court relied on Davis v. Laster. 138 So. 2d 558 (La. 1962). and Sohio Petroleum, but also
observed that the parties can, of course, provide otherwise by contract and cites Nordan-Lawton
Oil & Gas Corporation v. Miller, 272 F. Supp. 125 (W.D. La. 1967), affd, 403 F.2d 946 (5th Cir.
1968). as an example.
eluded the "in-lieu of production" phraseology which the elause in

Davis did not. 99
These two cases alone demonstrate that if a drafter wants to have
the shut-in royalty serve as a special limitation to the primary term,
clear express language to that effect has to be included in the clause.
Furthermore, if the lessee is to be obligated to pay shut-in royalties
regardless of whether a special limitation has been created, it probably
is necessary to avoid using "may pay." However, in Carlisle v. United
Producing Co.,100 the court assumed that had lessees failed to pay the
shut-in royalties during the primary term while the wells were shut-in,
the lease would have terminated.t Ol Kuntz criticizes102 this assump
tion and endorses Wilmer Masterson's view that a failure to pay shut
in royalties during the primary term does not terminate the lease un
less the clause expressly so provides. lOl In Carlisle the shut-in royalty
clause equated payment only with production and not with delay rent
als,104 and production was not needed during the primary term. The
reference to delay rentals was simply to identify the amount of shut-in
royalty. lOS The assumption in Carlisle, however, does suggest that a
lessee who is willing to commit to paying shut-in royalties during the
primary term but who wants to make sure that the clause does not
constitute a special limitation needs to make that clear.
Skelly Oil Co. v. Harris,106 carried the "no special limitation in
the primary term" conclusion one step forward by finding that the
shut-in clause did not provide the sole method of continuing the lease
in effect at the end of the primary term. Again, the court found signif
icance in the use of "may pay" rather than "shall pay." Where there
were drilling or reworking operations at the end of the primary term
another lease clause provided that the lease would not expire if those
operations led to production without a cessation of more than sixty
99. Article 3 of the Sohio Petroleum lease provided:

[Wjhere gas from a well producing gas only is not sold or used because of no
market or demand therefor, lessee may pay as royalty $50.00 per well, per year, payable
quarterly, and upon such payment it will be considered that gas is being produced
within the meaning of Article 2 of this contract.
Sohio Petroleum, 62 So. 2d at 617. Article 2 provided for a ten-year primary term and a secon
dary term for "as long thereafter as production continued." The lease was still within the pri
mary term at the time of the litigation and the court held that Article 3 did not provide for
forfeiture for nonpayment of the shut-in royalty and payment was not a condition precedent for
continuation of the lease at this stage. Id. at 620. Here also the lease says "may pay."
100. 278 F.2d 893 (10th Cir. 1960).
101. Id. at 894.
102. Eugene Kuntz, 12 Oil & Gas Rep. 876, 877-88 (1960).
103. Wilmer D. Masterson, The Shut-In Royalty Clause in an Oil and Gas Lease, 4 ROCKY
MTN. MIN. L. INST. 315, 337 (1958).
104. Therefore, by implication, if the shut-in royalty clause equated payment with delay rent
als, shut-in royalty would need to be paid during the primary term.
105. "[A]n amount equal to the delay rental as provided in paragraph (5) hereof' where gas
was not "sold or used." Carlisle v. United Producing Co., 278 F.2d 893, 894 (10th Cir. 1960).
106. 352 S.W.2d 950 (Tex. 1962).
days. This clause, the court said, gave the lessee sixty days after dis
covery to market and begin production. The lessee began production
after forty-one days. The net result is that failure to pay the shut-in
royalty did not operate as a special limitation even after the expiration
of the primary term.!07 Some shut-in royalty clauses have been
drafted to provide expressly for the Harris result. For example, in
Daly v. Key Oil CO.,108 a 1976 lease provided:
If at any time while there is a gas well or wells on the above
land ... such well or wells are shut-in, and if this lease is not contin
ued in force by some other provision hereof, then it shall neverthe
less 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 day (90-day) period, lessee ... may payor tender in advance
annual royalty payment of Fifty Dollars ($50.00) for each such well,
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 para
graph 2 hereof for one (1) year from the date such payment is made,
and in like manner subsequent advance royalty payments may be
made or tendered.!OO
The clause in this form has exceedingly limited value as far as the
lessor is concerned and can only be considered a "lessee's" form.
The clause in Daty should be contrasted with that in Hurley En
terprises, Inc. v. Sun Gas Ca. 110 In Hurley Enterprises the shut-in roy
alty clause provided that if a well was shut-in "at any time while this
lease is not being maintained in force by drilling or producing opera
tions on some other well" the lessee can pay shut-in royalties in "a
sum equal to the annual rental provided for herein."!!! Because there
was other actual production, no royalties were due under the clause.
The language in this clause is more focused than the language in Daty
in that it refers to activity that is either producing income for the les
sor or apparently on the way to doing so. It is, therefore, better lan
guage from a lessor's perspective. What if there had been a
contractual substitute for production in Hurley Enterprises because
shut-in royalty was being paid on an earlier gas well on the leasehold?
107. Cali-Ken Petroleum Co. v. Slaven, 754 S.W.2d 64 (Tenn. Ct. App. 1988). When the six
month primary term ended June 6, 1984, lessee was then reworking and continued without any
sixty-day interruption until January 21, 1985, when the well was capped. At that point, the court
said, the shut-in royalty clause came into operation, and it gave lessee one year to pay the shut-in
royalty, which was paid August 16, 1985, and therefore timely. See also Shell Oil Co. v.
Goodroe, 197 S.W.2d 395 (Tex. Civ. App. 1946), where the court treats the payment of the shut
in royalty as a "resumption of drilling or mining operations" within ninety days after cessation.
For the most recent discussion of Goodroe, see Marifarms Oil & Gas, Inc. v. Westhoff, 802
S.W.2d 123, 126 (Tex. Civ. App. 1991).
108. 404 N.E.2d 346 (Ill. App. Ct. 1980) (discussed in ROBERT E. BECK, ILLINOIS NATURAL
RESOURCES LAW 242-43 (1985».
109. [d. at 346·47 (emphasis added). In DOly the lease terminated before the lessee got
around to shutting-in the well and shutting it in later did not revive it.
110. 543 F. Supp. 359 (W.D. Ark. 1982).
111. [d. at 363.
Would that be production under this clause, thereby excusing shut-in

royalty payment on the second well? It would not under those leases
that provide that shutting-in constitutes a substitute for production for
purposes of the habendum clause,112 unless the shut-in royalty clause
is a part of the habendum.
On the other hand, in Greer v. Salmon,113 the argument failed
that on failure to pay shut-in royalties other savings provisions main
tained the lease. Production had commenced during the primary term
and carried over into the secondary term. However, between October
1956 and June 1960 there had been no production because of a leak in
the flow line which was not discovered until May 1960. The opera
tions clause did not apply because it was limited to cessation for
ninety days. As a result, the lessee's principal argument was that be
cause the habendum clause referred to the lease continuing as long as
oil or gas was "produced or producible"114 it was not necessary to pay
the shut-in royalty. The court decided that the shut-in royalty clause
was included as a condition and not as a covenant, so the failure to
pay the shut-in royalty terminated the lease. The court equated the
shut-in royalty on gas not sold or used with the "producible" language
in the habendum clause: The way you keep the lease alive with "pro
ducible" gas is by paying the shut-in royalty. The net result in Greer is
that it was to the lessee's detriment that a shut-in royalty clause had
been included in the lease.
In Gard v. Kaiser,115 the lessors' effort to cancel three leases
failed, not because other provisions in the lease saved it, but because
the lessee had marketed the gas within a reasonable time. The court
held that the language in these leases was not effective to make a
change in the Oklahoma law by adding a new special limitation. Pro
duction had commenced on all three leases within the primary term as
the result of one well. Gas from that well was sold from 1970 to 1972
when the pressure became too low for the gas to enter the pipeline.
Gas was marketed again in the secondary term from April 1975 to the
trial date; however no shut-in royalty payments had been made from
1972 to 1975 while the wells were shut-in. The court said that under
Oklahoma law marketing is not required for production and lessees
have a reasonable time after discovery to market. Although two of
112. Usually this would be in the form of a numerical reference to another clause.
113. 479 P.2d 294 (N.M. 1970).
114. Id. at 298.
115. 582 P.2d 1311 (Okla. 1978). Tho of the leases were dated March 25,1967, each with a
five-year primary term plus a production period; one lease was dated February 17, 1970, with a
six-month primary term plus a production period. For the most recent discussion and applica
tion of Gord, see Roye Realty & Developing, Inc. v. Watson, 791 P.2d 821 (Okla. Ct. App. 1990).
the clauses stated the lessee "may pay,"116 one clause stated the lessee
"shall pay;"117 therefore, that difference in language was not a decid
ing factor. However, the lessor under the third lease should have
been able to collect the shut-in royalties by covenant. us
In Blaser Farms, Inc. v. Anadarko Petroleum Corporation,119 the
court distinguished Gard and found that the parties were successful in
creating a special limitation, but it still refused to terminate the lease
even though the lessee was almost three months late in paying the
shut-in royalty. Based on an Oklahoma temporary-cessation-doctrine
case, the court concluded that Oklahoma would relieve this lessee
from application of the special limitation. The basic problem with this
reasoning is that apparently this shut-in royalty clause was designed to
deal with the temporary cessation problem and the clause seems quite
clear: "[T]he payment ... shall continue said lease."120 Perhaps the
court wanted the parties to add, "and we really mean it." What is a
drafter to do!
b. Effect of Pooling
Three cases involved the relationship between pooling and shut
in royalty clauses. These cases suggest that the lease must clearly
show the intention of the lessee and lessor as to that relationship. In
Odom v. Union Producing Co. ,121 six days before the expiration of the
ten-year primary term, the lessee pooled the tract with a tract contain
ing a shut-in gas well. No shut-in royalty was tendered until after the
primary term had expired. While the shut-in royalty clause referred
only to shut-in wells "on the leased premises," the court said that the
clause cannot be interpreted in isolation and must be construed to
gether with the clause giving the lessee the right to pool before or
after production and prescribing outcomes from the pooling. The
116. "Where gas from a well producing gas only is not sold or used, lessee may payor tender
a royalty of One Dollar ($1.00) per year net royalty acre retained hereunder, such payment ...
made, on or before the anniversary date of this lease next ensuing after the expiration of ninety
(90) days from the date such well was shut in and thereafter on the anniversary date of this lease
during the period such well is shut in, to the royalty owners ... If such payment or tender is
made it will be considered that gas is being produced within the meaning of the preceding para
graph." Gord, 582 P.2d at 1312.
117. During any period (whether before or after expiration of the primary term hereof)
when gas is not being so sold or used and the well or wells are shut in and there is no
current production of oil or operations ... lessee shall pay ... a royalty of One Dollar
($1.00) per year per net royalty acre retained ... such payment ... to be made, on or
before the anniversary date of this lease ... from the date such well is shut in and
thereafter on the anniversary date of this lease during the period such well is shut in, to
the royalty owners. . .. When such payment ... is made it will be considered that gas is
being produced within the meaning of the entire lease.
[d.
118. This assumes that "there is no current production" means "no actual production."
119. 893 F.2d 259 (10th Cir. 1990).
120. [d. at 261.
121. 141 So. 2d 649 (La. 1962).
court did not address the shut-in clause language which stated that "so
long as such lieu royalty is paid" the shut-in wells constituted produc
tion; instead the court referred only to the requirement that royalties
be "payable quarterly" as having been satisfied. 122
In Auzenne v. Lawrence Oil Co., 123 the court held that delay
rental was still due rather than shut-in royalty where a gas well was
drilled and shut-in on land that had been forced-pooled with the les
sor's land because the pooling was only for oil development. In As
berry v. Saint Joseph Petroleum,124 a gas well was drilled and shut-in
on a neighboring tract. A portion of the Asberry leasehold was
pooled or unitized with that neighboring tract and the lessee tendered
shut-in royalty within the primary term. The lease was maintained
thereby into the secondary term.
c. The Lack of Market Requirement

While it might be argued that a shut-in royalty clause stipulating
that a lessee is to pay "when a market cannot be secured for gas from
a well or wells producing gas only, and such gas is not being utilized or
sold on or off the premises" would work against the lessee, in Nordan
Lawton Oil and Gas Corporation v. Miller 125 it worked against the
lessor. The lessee convinced the court that it shut-in the wells not
because of a lack of a market, but because it wanted more information
about the nature of the field which could be obtained only by addi
tional drilling. Thus, the lease was not forfeited under the provision
that should royalties, including shut-in royalties, not be paid in a
timely manner "this lease shall automatically terminate as of the date
of such default."126 Nor, of course, would there be any contract claim
for lessor to collect the royalties.
On the other hand, in Taylor v. Kimbell,127 the same limitation
did seem to work against the lessee. In Taylor the clause read:
"where gas from a well producing gas only is not sold or used because
of no market or demand therefor, lessee may pay ... [the shut-in
royalty]."128 The express language "a well producing gas" would seem
to make a producible well a prerequisite, but when lack of market is
expressed as the required reason for shutting-in, it would seem that
the requirement of a well capable of producing is implicit. How could
the lessee be shutting-in because of a lack of any market unless the
122, [d, at 663,
123, 179 So, 2d 533 (La. Ct. App, 1965).
124, 653 S,W,2d 412 (Tenn. a, App. 1983),
125, 272 F. Supp, 125, 132 (W,D, La, 1967), affd 403 F.2d 946 (5th Cir. 1968) (district court
opinion relied on because appellate court opinion unclear).
126, 272 F, Supp, at 130.
127. 54 So, 2d 1 (La, 1951).
128. ld. at 2.
lessee has something to market? Perhaps, however, the focus of the

clause is intended to be on the additional word "only," that is, the
phrase is not intended to impose a producing precondition but a gas
only precondition. I29 Regardless of the reason for the requirement,
the court in Taylor holds that the shut-in royalty clause does not apply
because the well was ordered shut-in by the conservation department
due to salt water production and gas decline and therefore it was not a
well capable of producing gas. However, Hydrocarbon Management,
Inc. v. Tracker Exploration, Inc.,13° suggests that even without the "no
market or demand" language in the clause, a lessee would lose. In
Hydrocarbon Management the court concluded that to qualify for
shutting-in, the well "must be capable of producing gas in paying
quantities" without additional equipment. l3l The well developed
mechanical problems and the Railroad Commission ordered the well
shut-in. By the time the well was shut-in, it had ceased producing;
furthermore, the court concluded after reviewing evidence regarding
the mechanical problems, that as of May 30th,I32 it was not capable of
producing. I33 The court's review of the law makes it fairly clear that it
is applying what it believes is a general requirement of the law rather
than the language of the clause which states that a well "capable of
producing gas" can be shut-in.134 In Hydrocarbon Management the
Commission order probably would not have constituted force majeure
because the order was based on the lessee's conduct regarding the
mechanical problems. Thus, where the well is being shut-in as a result
of a quality problem, perhaps the courts will be less likely to treat the
condition as a lack of market. 135
If drafters want the shut-in royalty clause to cover a period of
shutting-in the well to deal with mechanical problems, it probably
would not be enough to strike the "capable of producing" language
otherwise commonly found in the clause. Drafters would need to give
"mechanical failure" as an express reason for shutting-in. Depending
on what language is used, the shut-in royalty clause could provide con
siderable flexibility in dealing with situations that might at first glance
seem to implicate the force majeure clause. Furthermore, if any gas
quality problem is anticipated, that also should be noted specifically as
a reason for shutting-in.
129. This phraseology is discussed extensively in KUNTZ, supra note 16, § 46.4(d).
130. 861 S.W. 2d 427 (Tex. Civ. App. 1993).
131. [d. at 433.
132. May 30th was "the day the well was allegedly shut-in by the RRC." [d. at 435.
133. Compare Risinger v. Arkansas-Louisiana Gas Co., 3 So. 2d 289 (La. 1941). See supra
note 71.
134. Hydrocarbon Management, 861 S.W.2d at 433-34.
135. See the discussion at supra note 71.
2. Summary Check-list and Some Suggested Language
Based on the foregoing discussion, the following check-list identi

fies the issues a lease drafter should consider relating to why a well
can be shut-in and why a shut-in royalty clause might be included in a
lease.
1. Consider whether the clause is to apply in the primary term
at all, and, if so, the consequence of failing to pay the shut-in royalty
during the primary term.
a. Have in mind the difference between "may pay" and "shall
pay."
b. Is shut-in royalty to be limited to a situation when lessor is
receiving no other payments?
Possible language: "during any period (whether before or after
expiration of the primary term) when a-well is shut-in;" "lessee shall
pay;" "should lessee fail to pay the shut-in royalty due during the pri
mary term [notice and forfeiture after thirty days if not paid] [interest,
costs, and attorneys' fees to collect]" "should lessee fail to pay the
shut-in royalty due during the secondary term when substitute produc
tion is not necessary to maintain the lease [as above];" "and while the
royalty is paid or tendered this lease shall be held as a producing lease
under the above term paragraph hereof [unless terminated sooner for
lessee's failure to perform some other duty under this lease];" "should
lessee fail to make timely payment of the shut-in royalty, the lease
shall terminate automatically."
2. Consider the amount of shut-in royalty, whether on a per
well basis136 or per-acre basis.137 On a per-acre basis the amount
could be by reference to the delay rental amount or independent
thereof. 138 Is the rate to escalate as time passes?139 Possible language:
"an amount equal to the delay rental provided for in paragraph
hereof."
136. The argument that was made in Vance v. Hurley, 41 So. 2d 724 (La. 1949), should be
considered even though it failed there. The lessor argued that because the shut-in royalty clause
provided for a shut-in royalty of $2000 per well, actual production from a well had to net the
lessor at least $2000 or the lease was to be cancelled.
137. See Scurlock, supra note 28.
138. For examples of clauses using the delay rental amount, see Robbins v. Chevron U.S.A.,
Inc., 785 P.2d 1010, 1017 (Kan. 1990); Marifarms Oil & Gas, Inc. v. Westhoff, 802 S.W.2d 123
(Tex. Ct. App. 1991); Pray v. Premier Petroleum, Inc., 662 P.2d 255, 258 (Kan. 1983).
See Reese Enterprises, Inc. v. Lawson, 553 P.2d 885 (Kan. 1976), where in a different con
text the Kansas court seems to view the delay rental amount as a floor. The court applies the
mathematical (or objective) test to determine whether there was production in paying quantities
because "this approach recognizes the interest of both the lessor and the lessee, and it gives the
lessor some protection when the burdens of the lease far exceed the meager royalty payments,
When they fall below the customary delay rental." 553 P.2d at 897. The 19161ease expired by its
own terms because of failure to produce in paying quantities.
139. See infra notes 180-182 and accompanying text.
3. Consider to what extent shut-in royalties are to be paid when

the lease is held by other provisions of the lease, whether express or
implied, such as force majeure, the operations clause, or the implied
duty to market. Consider also whether it will matter whether the
events occur within the primary term or the secondary term (see item
1, above). Also consider specifically whether the parties intend the
payment of shut-in royalties to have an impact on the implied duty to
market.
4. Consider how the shut-in royalty is to apply if the leasehold is
pooled or unitized.
5. Consider the significance of the requirement that the well be
capable of producing (particularly in the context of the quality of gas)
and whether that requirement is to be modified. Suggestion: Delete
"capable of producing" language or include a separate definition of
"capable of producing" for the shut-in royalty clause.
6. Consider whether all of the situations in which the lessee
would want to shut-in are to be expressed, specifically: no market,
poor market, government regulation, and mechanical or other opera
tional problems. 14o Where shutting-in is allowed because of market
factors, consider these factors specifically: lack of demand; lack of a
pipeline; insufficient quantity to attract a pipeline; inadequate pres
sure for the existing pipeline; and poor-quality gas. Suggestion: In
clude a separate definition of "shut-in" for purposes of the shut-in
royalty clause rather than trying to express everything in one
sentence. 141
7. Consider whether appropriate ejusdem generis or other lan
guage for flexibility is to be included. 142 Here varying gradations of
specificity are available, for example: "and other similar situations;"
"and other circumstances beyond the control of the lessee;" and
"whenever else a reasonable prudent operator would shut-in the
well."
III. SHUTTING-IN: FOR How LONG?
Some early writers on the shut-in royalty clause expressed con

cern that the shut-in could go on forever. John E. Kolb, for example,
expressed concern about treating the shutting-in as an extension of
the primary term as suggested in Shell Oil Co. v. Goodroe .143 He
thought it undesirable because the plain language "while such royalty
140. See the full range of phraseology supra text accompanying notes 23-25.
141. See the definition supra text accompanying note 85.
142. See William's suggestion set forth supra text accompanying note 95.
143. 10hn E. Kolb, Problems Arising in the Payment of Shut-In Gas Well Royalty in Texas, 2
So. TEX. LJ. 62,68 (1955) (citing Shell Oil Co. v. Goodroe, 197 S.W.2d 395 (Tex. Civ. App.
1946».
is so paid such well shall be held to be a producing well," would allow

the lease to go on "theoretically forever."l44 Kolb appears not to have
contemplated termination due to some other reason. Similarly, Frank
J. Scurlock expressed concern that the clause "would allow for an un
limited extension of a lease based on such small annual payments
under some circumstances. To correct this situation, it is important for
the lessor that such clause provide for an amount to be paid him in
keeping with the number of acres to be included in the lease; and, at
the same time, that the period provided for such extension be lim
ited."145 Wilmer Masterson, however, gave rather short shrift to the
concern that a lessee might be able to hold onto the lease indefinitely
simply by paying shut-in royalties:
A complete answer to the argument that a shut-in clause is un
fair to a lessor because it would allow a lessee to hold a lease for
ever without producing, is that the lessee owes a duty to be diligent
in searching for a market; for a breach of which he is liable possibly
for damages, cancellation or an alternative decree. Similarly the
shut-in well does not excuse the lessee from the usual implied cove
nants to further develop, to offset and to otherwise conduct himself
as would a reasonable and prudent lessee under the same or similar
circumstances. 146
Whether or not the lessee remains under the implied duty to mar
ket with due diligence and in a reasonable time147 has become one of
the principal questions raised with reference to the length of the shut
in period. John Lowe refers to the continued applicability of the im
plied covenant as a "probability. "148 The first section below discusses
the duty as to its impact on the length of the shut-in period. In addi
tion to the implied covenant to market, the natural response suggested
earlier,149 that a shut-in lasts as long as the reason for shutting-in,
144. Id. at 63.

145. Scurlock, supra note 28. "A seemingly intelligent handling ... was that ... in ... Vance
v. Harley, (215 La. 805, 41 So. 2d 724 (1949» where the shut-in gas royalty contracted for was
$2000 per well per year, with the added proviso that an extension in that manner could not
exceed three years. Many leases now gear those royalty payments to the delay rental payments.
An individual adjustment is desired in each case." Scurlock, supra note 28, at 41.
146. Wilmer D. Masterson, The Shut-In Royalty Clause in an Oil and Gas Lease, 4 ROCKY
MT. MIN. L. INST. 315, 330 (1958).
147. For a recent discussion of this duty, see Davis v. Cramer, 808 P.2d 358, 363 (Colo. 1991).
In Davis the Colorado Supreme Court held that the implied covenant to market oil and gas
"arises in the primary term of the lease." Whether that duty has been breached is a question of
fact to be decided on the basis of "whatever, in the circumstances, would be reasonably expected
of all operators of ordinary prudence, having regard to the interests of both lessor and lessee."
Id., quoting Gillette v. Pepper Tank Co., 694 P.2d 369, 372 (Colo. Ct. App.). On remand, in
Davis v. Cramer, 837 P.2d 218, 224 (Colo. Ct. App. 1992), the court found that a six-year delay
was an "inordinately long delay." Furthermore, forfeiture generally is favored in oil and gas
leases with leases "to be construed most favorably toward development" and liberally in favor of
lessor and strictly against lessee. Id. at 225. In the Davis situation all the nonactivity was within
the primary term; therefore, the shut-in clause was not needed to extend the primary term and,
therefore, the shut-in royalty clause does not operate as a special limitation. See supra notes 97
99 and accompanying text.
148. See supra text accompanying note 18.
149. See supra text accompanying notes 26-27.
needs to be considered. Finally, we must consider putting express du

rational limits into the shut-in royalty clause. These are discussed in
Sections Band C.
A. Implied Covenant to Market

In 1986 Bruce Kramer and Chris Pearson took a close look at the
question of the continued viability of the implied covenant to market
during the shut-in period. I50 They discuss the implied covenant to
market in some detail and include a seven-page discussion of the ef
fect of a shut-in royalty provision on the covenant. They found very
little authority and concluded: "[B]ecause of the paucity of cases, the
impact of shut-in royalty payments on the implied marketing covenant
will continue to be a matter of academic debate and speculation."151
However, they make two overriding suggestions. First, "acceptance of
shut-in royalty payments should not totally extinguish the lessee's
duty to market."152 Second, they suggest a difference in impact be
tween those jurisdictions that require actual marketing to meet the
production requirement and those that require only discovery. In the
actual-marketing jurisdictions, "the payment should be treated
solely153 as a means of satisfying the habendum clause require
ment. . . . [H]owever, the amount and duration of the payments
should be included in determining the reasonableness of the lessee's
actions in order to avoid delays prompted by market speculation."154
In the discovery jurisdictions, where payment is not required to keep
the lease alive,155 the fact that payments were made should not abro
gate the duty to market but it should be taken into account in deter
mining violation of the duty by placing a heavier burden on the lessor.
"Absent conditions showing substantially unequal bargaining posi
tions, fraud, or coercion, the payment of shut-in royalties in
Oklahoma-type jurisdictions should give the lessee greater freedom to
delay the marketing of the gas."156 However, they place this conclu
sion on the basis that the only purpose of the clause in a discovery
jurisdiction is to affect the marketing obligation so, therefore, it has to
have some effect. 157
150. Kramer & Pearson, supra note 11, at 801-08. Their discussion should form the start for
any exploration of the subject.
151. [d. at 807.
152. [d.
153. I am not sure that they mean that; they may only mean that it should not be treated as
excusing the duty to market.
154. [d.
155. This is probably also true in the actual marketing jurisdictions where shut-in royalty
payments are mandated even though not needed to preserve the lease.
156. [d. at 808.
157. In Oklahoma-type jurisdictions, however, payment of shut-in royalties is not
needed to satisfy the habendum clause requirements which propel the lease into the
secondary term. Therefore, the lessee is paying the lessor a royalty which, unless tied
There are cases that provide some support for the argument that
the implied duty to market is affected by the payment of shut-in royal
ties in a discovery jurisdiction. In Flag Oil Corporation v. King Re
sources CO.,IS8 the court held that the purpose of the two-year shut-in
clause was to extend the primary term for that duration. When the
two years were over, the lessee had a reasonable time with due dili
gence to find a market. This case provides very limited support be
cause excusing the duty to market depends on the decision that the
purpose of the two-year limit was, in essence, to provide a period
when the lessee had no duty.lS9
Of course, in an actual-marketing jurisdiction one reason for
shutting-in is to obtain a contract substitute for production, thereby
obtaining production without having to market. Obviously, the
lessee's duty to market has been affected. Irving Shimer explained
the decision in Union Oil Company v. Ogden 160 as follows:
The distinction between the Ogden lease [maintained by shut
in payment] and Deep Rock lease (expired) [no shut-in royalty
clause] situations can only be that where there is no shut-in royalty
clause, lessee is under a greater duty of obtaining a market-the
court being less concerned with the protection of a lessee who failed
to protect himself. The shut-in royalty lessee, on the other hand,
having bargained for a delay in marketing the gas, obtains the bene
fit of a longer period to comply with the implied covenant to market
the minerals. He is less limited by a reasonable time requirement
than by a requirement of exercising due diligence in finding a
market. 161
Shimer suggests a distinction between the due-diligence and rea
sonable-time aspects of the marketing duty when determining the ef
fect of the shut-in royalty clause. In other words, the lessee should be
able to forget about the reasonable time element; the lessee's conduct
is acceptable as long as the lessee is using due diligence to find a mar
ket. This may be the only sensible way to give lessee a break, whether
in an actual-marketing jurisdiction or a discovery jurisdiction. Ignor
ing the reasonable time element seems like a more definitive conse
quence than simply adding the presence of the shut-in royalty clause
to the pot as one factor to be considered, and it is more favorable to
the lessor than absolving the lessee except for fraud, as Kramer and
Pearson suggest. If the reasonable time element is not eliminated, it
to the marketing covenant, has no function. Thus, payment of such a royalty should be
treated as an express covenant relating to the marketing of gas.
[d. at 807.
See also the authors' discussion of the three Louisiana cases, Risinger, LeLong, and Laster,
noting the confusion in the courts. [d. at 802-04.
158. 494 P.2d 322 (Okla. 1972) (discussed infra notes 174-178).
159. Contra Young v. Dixie Oil Co., 647 S.W.2d 235 (Tenn. Ct. App. 1982).
160. 278 S.W.2d 246, 247 (Tex. Civ. App. 1955).
161. Shimer, supra note 37, at 572-73 (1956).
would be difficult to know by how much to extend the "reasonable

time" unless (1) some criteria was given or (2) a cut-off date was pro
vided. I am not familiar with any clause involving the former, but the
latter clearly exist. 162 If the duration of the shut-in is "at the lessee's
discretion' that brings us back to the prudent operator rule. Treating
the lessee the same in a discovery jurisdiction as in an actual market
ing jurisdiction should be adequate for that lessee.
James B. Sandlin had argued that because a lessee could have
kept the lease alive during the primary term by payment of delay rent
als, a duty to market after payment of shut-in royalties ought not arise
until the primary term has ended.163 This argument has most merit
when applied to those shut-in clauses providing for shut-in royalties to
be measured by the delay rental amount. Where, however, the shut-in
royalty clause provides for a much smaller amount, it is questionable
whether the argument has equal force. An analogous argument would
be that just as the duty to produce is waived during the period of delay
rental payment, the duty to market should be waived during the pe
riod of shut-in royalty payment. However, the situations are different.
The lessor anticipated that the lessee might not drill until the end of
the primary term since the delay rental clause is designed to give the
lessee that option. The shut-in royalty clause was not designed to give
the lessee that option. To support the analogous argument we would
have to argue that a lessor generally does not expect production
before the end of the primary term regardless of the use or nonuse of
the delay rental clause.
While there is some support for relaxing or waiving the implied
duty to market during the period that shut-in royalties are paid, there
are several cases in which the courts say, in no uncertain terms, that
the covenant remains applicable. The Kansas Supreme Court was
clear in Pray v. Premier Petroleum, Inc. :164
[P]ayment of shut-in gas royalties does not excuse the lessee
from his duty to diligently search for a market and to otherwise con
duct himself as would a reasonable and prudent lessee under the
same or similar circumstances. Indeed, the implied covenant to rea
162. See infra notes 173-74.

163. Sandlin, supra note 11, at 114-115. His discussion is in the context of Arkansas law and
practice.
Some support for this view comes from Gazin v. Pan American Petroleum Corporation, 367
P.2d 1010 (Okla. 1962). In Galin, a gas well capable of producing in excess of twenty million
cubic feet of gas per day was completed in October 1956 and shut·in. Production was not sold
until April 1960. Primary term expired in May 1959. The court determined the lease was still
good. Because delay rentals were paid in May 1957 and May 1958 "as provided in the lease"
(this is not explained further in the opinion) lessors waived right to marketing during primary
term. [d. at 1011. Therefore, the court examined the lessee's due diligence and whether the
delay was for a reasonable time from the end of the primary term, May 1959. !d. at 1012. By
analogy it might be argued that the duty is waived during the period of a shut-in royalty
payment.
164. 662 P.2d 255 (Kan. 1983) (shut-in over seven years and lease still good).
sonably develop the leasehold is applicable .... [T]he evidence in

dicates the lessee diligently searched for a market. 165
The Tennessee Court of Appeals took the same approach in Young v.
Dixie Oil CO.166 However, in neither Young nor Pray had the duty
been violated. Thus neither case presents the acid test that the duty
will be applied. However, Tucker does.
It is possible, of course, for the shut-in royalty clause to address
the marketing duty expressly. Williams sets forth one clause that pro
vides: "Lessee shall use reasonable diligence to market gas ... capa
ble of being produced from such shut-in well but shall be under no
obligation to market such products under terms, conditions or circum
stances which, in lessee's judgment exercised in good faith, are unsat
isfactory."167 In Johnson v. Phinney,168 the clause included the
following language:
. . . provided Lessee exercises all reasonable diligence to obtain a
market for such production, but in the exercise of such diligence,
shall not be obligated to construct plants, pipe lines, or other facili
ties off the lease premises, or to settle labor disputes, or to market
gas on terms considered to be below the fair market value of same.
It is useful to ask the more general question of what impact shut
ting-in under a shut-in royalty clause has on all other lease covenants,
such as the implied covenants of reasonable further development and
protecting the property against drainage. 169 Obviously these implied
covenants are not unrelated. For example, if the reason for shutting
in a well is that the one well does not produce enough gas to justify a
pipeline extension, then the implied covenant to market, in all likeli
hood, requires the lessee to continue development until enough wells
exist to justify such extension.
B. Duration Commensurate with the Reason

If a shut-in royalty clause contains a reason for shutting-in, then it
would seem that a natural limit on the length of the shut-in period
would the time the reason continues to exist. There are some shut-in
royalty clauses that make that express. A form quoted in LeLong v.
Richardson 170 states: "[F]or lack of a market at the well or wells,
Lessee may pay to Lessor $100.00 ... until the production thereof can
be profitably marketed."171 However, if the clause states a reason for
165. ld. at 258. Accord Robbins v. Chevron U.S.A., Inc., 785 P.2d 1010 (Kan. 1990); Thcker
v. Hugoton Energy Corporation, 855 P.2d 929 (Kan. 1993).
166. 647 S.W.2d 235 (Tenn. Ct. App. 1982).
167. WILLIAMS, supra note I, § 631, at 396-97.
168. 287 F.2d 544, 545 (5th Cir. 1961).
169. See the excerpt in the text from Masterson, supra text accompanying note 146.
170. 126 So. 2d 819 (La. Ct. App. 1961).
171. ld. (emphasis added). For another example clause, see Phillips Petroleum Co. v.
Harnly, 348 S.W.2d 856 (Tex. Cjv. App. 1961):
which it can be exercised, then it would seem that the shut-in period
should end when that reason ends without the necessity of having to
say so in the clause.
The major problem with this approach to limiting the duration of
the shut-in would be in identifying the reason for which the well has
been shut-in, particularly in circumstances where several reasons are
recognized under the clause. Lessees can succeed, however. In Nor
dan-Lawton Oil and Gas Corporation v.Miller,l72 the lessee convinced
the court that it had shut-in the wells because it wanted more informa
tion about the nature of the field which could be obtained only by
additional drilling and not because of a lack of a market.
C. Express Language
Many existing shut-in royalty clauses contain express time limits
on how long a well can be shut-in. These limits range from two years
to five years. 173 However, unless carefully drafted, problems can arise
even in their application, as illustrated by Flag Oil Corporation v.
King Resources CO.174
Flag Oil arose in Oklahoma, a discovery jurisdiction. The clause
provided in part: "It is further provided that lease cannot be perpetu
ated beyond August 8, 1964, by payment of shut-in gas well royalties
as provided in Paragraph 5, hereof, but this restriction shall not pres
ent [sic] the perpetuation of this lease under other provisions of
same."175 On the facts, the court held that the purpose of the two
year shut-in clause was to extend the primary term for that duration.
Thus when the two-year term was over, the lessee had a reasonable
time with due diligence to find a market. Therefore, the lease did not
end at the expiration of the two-year shut-in period. Eugene Kuntz176
lIJf, in the judgment of Lessee, it shall become unprofitable or uneconomical to

produce the same due to the low price obtainable for such products or due to the re
stricted allowable production under the laws of the state in which the land is situated,
under any federal law, or under the orders or regulations of the appropriate governing
bodies, and, if, in the judgment of Lessee, such unprofitable or uneconomical condi
tions are temporary, then Lessee may shut-in and cease producing during the existence
0/ such unprofitable or uneconomical conditions, for a period not in excess of two (2)
years.
[d. (emphasis added).
172. 272 F. Supp. 125, 132 (W.D. La. 1967), a/rd, 403 F.2d 946 (5th Cir. 1968) (district court
opinion relied on because appellate court opinion unclear).
173. Phillips Petroleum Co. v. Harnly, 348 S.W.2d 856 (Tex. Civ. App. 1961) (two years);
Patton v. Rogers, 41 Oil & Gas Rep. 545, 556 (1972) (two years); Flag Oil Corp. v. King Re
sources Co., 494 P.2d 322 (Okla. 1972) (two years); Vance v. Hurley, 41 So. 2d 724 (La. 1949)
(three years); Moyer v. Walker, 276 F.2d 681 (10th Cir. 1960) (three years); P.M. Drilling, Inc. v.
Groce, 792 S.W.2d 717 (Tenn. Ct. App. 1990) (three years); Young v. Dixie Oil Co., 647 S.W.2d
235 (Tenn. Ct. App. 1982) (five years).
174. 494 P.2d 322 (Okla. 1972). The lease was dated August 8,1957. It has a five-year pri
mary term, and continued in a secondary term as long as gas was produced. The shut-in period
ended August 8, 1964, two years beyond the primary term.
175. [d. at 323.
176. Eugene Kuntz, 41 Oil & Gas Rep. 554 (1972).
noted that the parties could either place an outside time limit on the
continuation of the lease in the absence of a market or postpone dili
gence for a set time. He said Flag interpreted the clause as doing the
latter, while the lessors interpreted it as doing the former. In compari
son to Flag, Patton v. Rogers 177 contained an "attached rider" which
stated: "Anything contained herein to the contrary notwithstanding,
it is understood and agreed that this lease as to its entirety cannot be
maintained in force solely by the payment of shut-in gas royalty for a
period in excess of two (2) years beyond the expiration of the primary
term hereof."178 According to the Patton court, the use of the word
"solely" did not mean that payment of the shut-in royalty coupled
with the sale of gas, whether in paying quantities or not, would main
tain the leaseP9 The court agreed with the plaintiff that the provision
meant that the shut-in royalty could not maintain the lease beyond
two years; if the lease is to continue longer, some other independent
reason has to be found. The only difference seems to be that Flag was
from Oklahoma, so an independent reason for maintaining the lease
was marketing within a reasonable time; Patton was from Texas so
marketing had to exist at the expiration of the stated term.
In addition to language that places a direct limit on how long the
shut-in period can continue, it is possible to have provisions in the
clause that will encourage the lessee to cut the period as short as pos
sible. Shimer suggests that a lessor concerned with unduly long shut
ins could provide for stepped-up royalty as the delay continues.1 8o
The lease in Patton v. Rogers 181 contained a clause that provided for
an initial shut-in period of two years based on a straight shut-in roy
alty payment. To continue the shut-in beyond two years, the lessee
had to pay shut-in royalty plus tender a release of acreage except for
forty acres surrounding the shut-in well. In Blaser Farms, Inc. v.
Anadarko Petroleum Corporation,182 the clause provided for a $3.00
per-acre shut-in royalty if the pipeline connection was not made dur
ing the first year and a $5.00-per-acre shut-in royalty if it was not
made during the second year.
177. 417 S.W.2d 470 (Tex. Civ. App. 1967).

178. [d. at 472, 476. The rider then went on to provide that a $40 shut-in royalty for each
well, coupled with a release for the balance of the acreage, would maintain the well without any
set time limitation. The well would include forty acres.
179. The extension would be over as of December 28,1965. Six days before December 28
the lessee ran a line to a neighboring oil well where gas was used to operate the pump, claiming
that the gas would be paid for at sixteen cents per Mcf. The court still found that no bona fide
commercial market was available and that a reasonable prudent operator would not continue to
produce under the circumstances. The case reaffirms that to have production in paying quanti
ties there must be an available market.
180. Shimer, supra note 37.
181. 417 S.W.2d 470 (Tex. Civ. App. 1967).
182. 893 F.2d 259, 261 (10th Cir. 1990).
IV. CONCLUSION
Because the shut-in royalty came into being to provide compen

sation to the lessor while a well was shut-in and because many lease
forms fail to provide this compensation, the lessor should examine the
shut-in royalty clause proposed for any lease to determine whether it
binds the lessee to provide the lessor with royalty whenever a well is
shut-in. It should always do so, but the related question of whether
the clause is to be treated as a special limitation should be subject to
agreement between the parties in each case; the conclusion may well
differ, for example, depending on whether the shut-in royalty is being
paid during the primary term or during the secondary term.
Because many lease forms contain limitations on the reasons for
which a well can be shut-in under the shut-in royalty clause and be
cause some courts are going to restrict the reasons that will justify
shutting-in absent express language in the clause, the lessee should
examine the shut-in royalty clause proposed for any lease to deter
mine whether it allows the lessee to shut-in for any and all purposes
that the lessee might want.
In the absence of limiting language in the clause, a court should
interpret the clause broadly from the perspectives of both the lessor
and lessee. The courts should consider that the clause should provide
compensation to the lessor whenever a well is shut-in and provide the
lessee with the opportunity to shut-in for any legitimate business rea
son. Whether failure to pay the shut-in royalty should result in the
termination of the lease should depend on the wording of the clause,
but that prospective result should not skew a court's construction of
the clause.
Furthermore, all of the lessee's duties, except those expressly ex
cused by the clause, should continue. This includes the duty to market
with due diligence in a discovery jurisdiction, although the court could
treat the "within a reasonable time" element as waived. Considera
tion of due diligence would take into account not the simple fact that
the well is shut-in, but rather the reason why the well is shut-in. When
that reason no longer exists, marketing should be at hand.

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Shutting-in: For What Reasons and For How Long?

II. Shutting-in: The Reasons .................................................. 752

c. The Lack of Market Requirement ................................. 774

2. Summary Check-list and Some Suggested Language. . ..... ... . .. . . . . .. . 776

C. Express Language. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 783

Oil and gas leases executed today usually contain a provlSlQn

to produce;6 reasons for shutting-in;7 and references to specific

II. SHUTIING-IN: THE REASONS

As noted in Part I, this part will focus on three questions:

The second category includes as reasons to shut-in: "market or

the variation?25 Standardization certainly would reduce the need to

A. How Should the Shut-in Royalty Clause that Specifies no

While text-writers generally identify the purpose of the shut-in

25. In 1960 Eugene Kuntz wrote:

two parallel developments. Under the three-stage scenario, the first

49. This difference is discussed infra notes 97-118.

Supposing that the foregoing three-stage development theory of

be added when production only required discovery in those jurisdic­

likely as quickly and as remuneratively as possible.67 The lessee (put­

of a sufficient quantity.72 Each of these situations at one time or an­

Defendants established the twenty billion cubic feet of reserves

74. [d. at 1012-13.

79. See language quoted supra text accompanying note 19.

B. Should the Permissible Reasons for Exercising the Shut-in

least a sporting opening for the advocate if enough is at stake."94 But

C. What Form Should the Expression of Reasons in the Shut-in

Royalty Clause Take?

Because shut-in royalty clauses have included a variety of reasons

1. Problems that have Arisen Either as to the Reason for Including

the Shut-in Royalty Clause in the Lease or as to Reasons

a. Creation of a Special Limitation and the Obligation to Pay

97. 837 P.2d 218, 223-24 (Colo. Ct. App. 1992).

eluded the "in-lieu of production" phraseology which the elause in

99. Article 3 of the Sohio Petroleum lease provided:

Would that be production under this clause, thereby excusing shut-in

c. The Lack of Market Requirement

lessee has something to market? Perhaps, however, the focus of the

2. Summary Check-list and Some Suggested Language

Based on the foregoing discussion, the following check-list identi­

3. Consider to what extent shut-in royalties are to be paid when

III. SHUTTING-IN: FOR How LONG?

Some early writers on the shut-in royalty clause expressed con­

is so paid such well shall be held to be a producing well," would allow

144. Id. at 63.

needs to be considered. Finally, we must consider putting express du­

A. Implied Covenant to Market

would be difficult to know by how much to extend the "reasonable

162. See infra notes 173-74.

sonably develop the leasehold is applicable .... [T]he evidence in­

B. Duration Commensurate with the Reason

lIJf, in the judgment of Lessee, it shall become unprofitable or uneconomical to

177. 417 S.W.2d 470 (Tex. Civ. App. 1967).

Because the shut-in royalty came into being to provide compen­

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be added when production only required discovery in those jurisdic

likely as quickly and as remuneratively as possible.67 The lessee (put

of a sufficient quantity.72 Each of these situations at one time or an

Based on the foregoing discussion, the following check-list identi

Some early writers on the shut-in royalty clause expressed con

needs to be considered. Finally, we must consider putting express du

sonably develop the leasehold is applicable .... [T]he evidence in

Because the shut-in royalty came into being to provide compen