Arizona Revised Statutes
Title 27 - Minerals, Oil and Gas
§ 27-555.01 - Extension of lease due to lack of transportation, processing facilities or market

27-555.01. Extension of lease due to lack of transportation, processing facilities or market
A. When the owner of an oil and gas lease issued pursuant to this chapter has discovered oil or gas on the leased premises or on lands joined therewith in a cooperative or pooled unit, while the lease is in full force and effect, but is unable to produce oil or gas in paying quantities because of lack of transportation or processing facilities or a market for the oil or gas that would support production in paying quantities, each lease on which there is an oil or gas well or which is part of the cooperative or pooled unit shall be extended beyond the primary term, or any extension of the lease under section 27-555, subsection E, paragraph 1, from year to year, but not to exceed a period of five years, by payment of a shut-in oil or gas royalty of one dollar per acre for the first year, two dollars per acre for the second year and three dollars per acre for the third, fourth and fifth years, payable in advance annually on the anniversary date of the lease. If the payment is made it will be deemed that oil or gas is being procured and produced in paying quantities from the leased premises for such year.
B. To successfully assert shut-in status under subsection A of this section, the owner of the lease must:
1. Complete the well by installing and perforating production casing, by installing a production liner at reservoir depth or by other standard industry practices.
2. File a standard well completion report with the commission indicating an oil or gas discovery.
3. Submit to the department, not later than thirty days before the expiration of the lease, and at or before tendering the first year's shut-in royalties, a copy of the well completion report filed with the commission and the information described in either subdivision (a) or (b) of this paragraph. A well meeting either of the following criteria is considered to be capable of production in paying quantities for the purposes of this section:
(a) A calculation reasonably demonstrating that, as of the date of submission, the monthly proceeds of the well would be expected to exceed the well's monthly operating expenses, if transportation and processing facilities were present and a market existed. The owner may estimate monthly production based on well test results and any other data the owner considers helpful, estimate the monthly value of that production using approximate then-current pricing and estimate monthly operating expenses for the well based on recent history of comparable wells. Costs of drilling, completing and equipping the well shall not be considered in the calculation.
(b) Information satisfying any other alternate test that may be adopted by the department for demonstrating capability to produce in paying quantities, if transportation and processing facilities were present and a market existed.
C. If the department considers that the requirements of subsection B of this section have not been met, it has ninety days after receiving the submission required under subsection B, paragraph 3 of this section in which to deny shut-in status by appealable agency order, which must identify with reasonable particularity the basis for the determination that the requirements of subsection B of this section have not been met. The lease shall remain in effect pending final resolution, whether administrative, judicial or otherwise, as to whether the criteria in subsection B of this section have been met.
D. Subsection B of this section sets forth the full set of information that an owner of a lease must furnish the department with reasonable particularity before the expiration of the lease for which shut-in status is asserted. To assert shut-in status, further reviews or additional tests or audits shall not be conducted for the owner to be entitled to a lease extension pursuant to this section.
E. This section shall apply to existing oil and gas leases in good standing.

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