With the low price of oil and the COVID-19 pandemic directly affecting oil producers’ ability to operate profitably, many producers are reaching out to royalty owners asking for their cooperation during these times. That could include a temporary reduction in royalties when operations are suspended.
Below is a sample letter for operators to send to their royalty owners asking for them to temporarily amend the terms of their lease during these uncertain times.
Much has changed since our letter to you last week. The price of oil has dropped an additional 35%, and the price we are receiving for oil is now below our cost to operate. There is also concern regarding the refineries and their ability to continue taking oil and, more importantly, to pay. Further, response to the Coronavirus (COVID-19) is directly and negatively affecting our ability to operate in a safe manner. Recent orders by the State of XXX and individual counties have impacted our supply chain and employee availability. Although oil and gas producers are considered an essential business by some jurisdictions, this could change and we continue to monitor the situation.
Our intent is to continue operating if we able. However, should the price drop further, we cannot sell the oil, or we can no longer operate due to conditions outside of our control, we will have to shut in operations until market conditions change. To help keep operations going, we ask that you execute the attached amendment to the oil and gas lease. It has two requests: 1) a temporary reduction in royalty tied to price, and 2) an update to the price under which operations are suspended to match our breakeven point.
Please note, that even with your cooperation in the amendments above, we cannot guarantee operations will continue and we may need to shut in under the force majeure provisions in the lease. Should this occur, I will keep you updated as information becomes available.
Please print, sign, scan and email me back the attached by XXX. Paper copy can be mailed to XXX.
If you have any questions, please feel free to call XXX or email me XXX.
Regards,[YOUR NAME], [TITLE]