Mineral Rights Forum

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Let's touch on the non-participating royalty interest (NPRI) for a moment. 

A NPRI is a non-possessory right in the royalty, which burdens the interest owned by the owner of the minerals.  The NPRI has no interest in the minerals in place, but rather is a share of production that is free of the costs and expenses of exploration and production.  The NPRI has a share of the production when it comes to the surface and is not a possessory interest. The NPRI does not have the right to execute an oil and gas lease.  The NPRI has no right to drill a well.  The NPRI is bound by the lease terms, except the pooling provision.

Now, let's look at a situation that is common.  (This situation will become more common as the owners of a NPRI become more educated or retain someone to represent their interests.)  

The situation is where a mineral owner executes a lease and there is an outstanding NPRI burdening his interest, or a non executive mineral interest owner (NEMI).  The oil company will at some point come to the NPRI or NEMI, especially if the lease is a drillsite tract, to have the NPRI/NEMI ratify the lease as to pooling, or ratify the unit declaration.  

There must be some pooling contract to bind the NPRI owner, because the mineral interest owner cannot bind the NPRI/NEMI owner as to pooling.  (On a horizontal well in Texas, each tract that the wellbore passes under becomes a drillsite tract.)

What if the NPRI/NEMI owner decides NOT to ratify the unit or to have some pooling contract?  In that case, absent any agreement to the contrary, the excess NPRI/NEMI share of production gets taken out of the mineral interest owner's share, to the extent that the mineral owner's share can be reduced, then it comes from the working interest owner's share of production.

Let's look at a real world example.

NPRI = 1/16 in 320 acres (E/2 of survey)

MI = 100 % minerals in 320 acres (E/2 of survey), less the NPRI above.  MI owner executes a lease providing for 1/4 royalty

640 acre unit, pooling the entire 320 acre tract.  The unit well is on the 320 acre tract.

Here is the math.

1/4 royalty x 320/640=.125 in the well, if there were no NPRI interest.  BUT THERE IS A NPRI OWNER.

OOPS, the NPRI elects to NOT ratify.  The NPRI interest is .0625 and is not diluted by the pooling.  Therefore the MI owners eats the entire .0625 excess royalty and his unit royalty is now reduced to only .0625 of production.

If the NPRI would have ratified the unit, the MI owner's share of production would be (4/16 - 1/16)*(320/640), or 3/32, or 0.09375.  The MI owner's share of production would have been increased by 50% in this case if the NPRI would have ratified the unit.  This is what is called EXCESS ROYALTY.

Can our poor MI owner do anything about this?

Of course.  

By contract, which means the lease itself.

Example language might read as follows:

"5.17       IT IS EXPRESSLY PROVIDED, HOWEVER, THAT SHOULD LESSOR’S INTEREST IN ANY LANDS COVERED BY THIS LEASE BE SUBJECT TO A NON-PARTICIPATING ROYALTY OR NON-EXECUTIVE MINERAL INTEREST, LESSOR’S ROYALTY SHALL PROPORTIONATELY BEAR SUCH NON-PARTICIPATING ROYALTY OR NON-EXECUTIVE MINERAL INTERESTS TO THE EXTENT, AND ONLY TO THE EXTENT, THAT SUCH INTERESTS WOULD BE BORNE BY LESSOR IF THE OWNERS OF THOSE INTERESTS ADOPTED AND RATIFIED ALL FOR THE TERMS OF THIS LEASE, WHETHER OR NOT SUCH ADOPTION OR RATIFICATION HAS IN FACT OCCURRED.  PROCEEDS DUE ANY OTHER THIRD PARTY FOR PRODUCTION FROM A WELL ON THE LEASED PREMISES SHALL BE BORNE BY LESSEE."

Negotiating oil and gas leases is more than asking how much is the bonus and how much is the royalty. Don't put yourself in a troubling situation when it could have been handled at the time of lease execution. Get some representation and protect your interests.

Best,

Buddy Cotten

Mineral Manager

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