We have a 20% royalty. A recent NPRI has claims to 1/16 of it. We are having trouble understanding the formula the Drilling Company is using.
If the NPRI was carved out years ago and your lands are affected, they would get 1/16th of the royalties, or 0.0625% to your 20% minus the NPRI so 0.1375% on the net acreage covered divided by the unit size.
Doesn’t it depend on the specific terms of the deed granting the NPRI?
For example, what if the land was completely clean (no mineral interest had ever been conveyed to anyone), and the owner of 100% of the mineral estate (Mr. Mineral Owner One) conveyed an NPRI of 1/10 of any and all minerals subsequently produced from the property.
Then later, Mr. Mineral Owner One sells all his minerals to Mr. Mineral Owner Two, who then leases the minerals to XYZ Energy Company and reserves a 20% royalty. XYZ drills a profitable well and starts producing
Wouldn’t Mr. Mineral Owner Two’s net royalty be 20% of the 90% remaining? So the NPRI gets 10% of the production, Mr. Mineral Owner Two gets 18% of the production, and XYZ Energy gets 72% of the production?
I’m new to this, but I have an NPRI similar to what I described and assumed that is how it was being calculated.
Interpretation of NPRI depends on state law. It has been a hot topic in Texas legal cases in the last decade, particularly whether it is a fixed or floating NPRI in the original deed creating the NPRI. In addition, there can be a question as to whether a subsequent grant of minerals is subject to its proportionate share of the NPRI or whether the grantor retained the entire burden against the his remaining minerals.
TexasOwner13 in your breakdown, XYZ should get 80% of the proceeds from production as they have WI of 100%, less the mineral owner royalty of 20%. Or 80% revenue for the Operator/XYZ. The NPRI burdens the mineral owner side of the setup not the working interest side. When a mineral owner executes a lease and there is a NPRI involved, the lessor shares the royalty reserved in the lease with the NPRI owner in the amount owned.
The NPRI calculation is contingent on the quantity of mineral interest that is involved with the NPRI conveyance or reservation. Just one of the variety of issues when dealing with a NPRI.
In your example: MO1 owns fee simple absolute title and sells 1/10th NPRI and MO1 retains all executive rights and 9/10ths interest to the royalty from production. Then MO1 sells all its interest to MO2 and retains nothing. MO2 leases for a 20% royalty lease that covers all the mineral rights in the unit. From here, to pay the royalty owners the 20% lease royalty you will account for the the 1/10th NPRI which reduces the amount of revenue due to the lessor by the amount of the NPRI burden. 20% - 2% = 18% for the executive rights owner/lessor, and 2% for the NPRI owner. WI/RI Breakdown
MO2: WI: 0 NRI: 0.18
NPRI owner: WI: 0 NRI: 0.02
WI Owner: WI: 1 NRI: 0.80
I hope I’ve made no errors but if so lets check and see.
Thanks. Like I said, I’m new to this and that explanation really helps.
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