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(1) An operator of an oil well producing upon state lands pursuant to a state oil and gas lease, may apply to the director of the department of natural resources and conservation to temporarily shut-in an oil well for a one year period of time. If the director of the department has shown the three elements as listed below, the director may allow the operator to temporarily shut-in the oil well for one year period of time upon the operator's payment of shut-in oil royalties. The operator must show that:

(a) the oil well is incapable of producing in paying quantities at current market values for the oil produced;

(b) a significant amount of oil production can be recovered in the future from the producing formation through the use of equipment presently used at the well head of the oil well;

(c) the well is currently capable of producing in paying quantities should the market value of the oil produced be equal to $25.00 per barrel.

(2) Production in paying quantities for the purposes of this rule is defined as production in quantities sufficient to yield a return in excess of operating costs, even though drilling and equipment costs may never be repaid and the undertaking as a whole may ultimately result in a loss.

(3) All direct costs incurred in the prudent operation of a lease whether paid or accrued may be considered as proper expenditures in the calculation of operating costs. These direct costs include, but are not limited to: labor, trucking, supervision, office maintenance, bookkeeping and accounting, treating oil to make it marketable, and maintenance and repair of roads, entrances, fences, and gates. The bonus paid for the lease, drilling costs, and costs of lease equipment shall not be considered to be direct costs of operation.

(4) In determining whether to allow the extension of the lease by payment of shut-in royalties, the director may also consider whether the temporary shut-in of the oil well would adversely affect correlative rights or the operator's implied covenant to offset drainage occurring on the lease.

(5) Shut-in oil royalties shall be in the amount of $100.00 per lease per year or the amount of the annual lease rentals, whichever is greater. Shut-in royalties must be paid within 30 days of the director's decision to allow extension of the lease by payment of shut-in oil royalties. As long as such leased lands contain an oil well capable of production as described by the three elements listed above, and shut-in royalty payments are made, the lease shall be considered a producing lease under the lease terms. The lease will be held by the payment of shut-in oil royalties for 1 year effective on the 1st day of the month following the month in which shut-in oil royalties are received by the department.

(6) No equipment shall be removed from the lease while the lease has been extended by the payment of shut-in oil royalties, so as to render the well incapable of production. Nothing in this rule shall be construed to prevent repair or replacement of equipment necessary for production. Each oil well temporarily shut-in by operation of this rule shall be maintained so as to be immediately operable.

History: 77-3-402, MCA; IMP, 77-1-202, MCA; NEW, 1986 MAR p. 2010, Eff. 12/12/86; TRANS, 1996 MAR p. 2384.

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