I own a farm that straddles the North Canadian River in Oklahoma. What would normally be an 80 acre farm becomes 73.4 acres on the legal documents, plus "riparian rights". In fact, the land is divided into "lots" because of the river. Likewise, I have 73.4 acres of minerals. This makes for a "short" section when you add all the mineral rights up on the division order - quite a bit less than the expected 640 acres.
It appears than no one actually owns the mineral rights under the rivers. It also appears that the oil companies reap the benefit, since the royalty payouts are less than they would be under a regular section.
Does not seem quite right. At the very least, you would think the state would lay claim to those minerals. Does anyone have any experience with this, or comments?
It's not quite like that, you see the gross acres also change. If you own 73.4 acres in say a short quarter section (153.4 acre) spaced well at 3/16ths royalty, you will receive 0.12222% royalty per acre. If they changed it to a full 160 acre section and you owned a full 80 and it is a 160 acre gross spaced well and at the same 3/16ths, you'd receive 0.11718% per acre royalty in the well (which is less). The operator doesn't get the extra 6.6 acres of production, you and the owner of the other 80 acres get more, the operator gets the same 13/16ths or 81.25% of production.
Look at this another way:
When you look at the Net Revenue Interest in your example, it looks like this:
Me: 0.0897164 (73.4/153.4*0.1875)
Neighbor: 0.0977835 (80/153.4*0.1875)
Operator: 0.8125 (the remainder)
The Operator gets 81.25% of production just as if they had leased 160 acres. However, they only leased and paid bonus money on 153.4 acres. (Yes, their percentage is the same either way, but that is not the whole story.)
My neighbor benefits from the river. He would have gotten a NRI of 0.09375 had I owned a full 80 acres and the river not been there. Instead, he gets a larger NRI because of my misfortune of having the river cross my place. In this case, the presence of a river, which is not even on his property, causes him to get a larger NRI than he would had the river not been there.
The operator only benefits from paying less bonus but they will still have to pay out 18.75% on a 3/16ths lease. Yes, your neighbor gets more but as for your misfortune, you get more royalty per acre but paid less total price. Say your purchase price was $1000 per acre surface and minerals, you only paid $73,400 for a higher royalty per acre instead of paying $80,000 for a smaller royalty per acre. You only paid for 73.4 acres yet you receive a higher royalty than most would have if they had purchased 80. Everyone benefits but yes it seems like your neighbor benefits the most but it's not at your expense.
The second to last sentence was suppose to read "You only paid for 73.4 acres yet you receive a higher royalty (per acre) than most would have if they had purchased 80." The bottom line is you didn't pay for those other 6.6 mineral acres but benefit from it.
There's something intuitively wrong when "everyone benefits", but this appears to be the case. Take this to the extreme. Assume that the river takes out 79 acres of the farm, and I only have 1 acre. My neighbor still has 80 acres.
The NRI would be as follows:
Me: 0.0023148
Neighbor: 0.1851851
Operator: 0.8125
I should have mentioned that in this case the bonus is substantial ($2250/acre). In this extreme:
1) The Operator saves $177,570 in bonus payments.
2) My Neighbor gets a big bump in his NRI, almost double.
3) On a per acre basis, I get a huge bump over what I would have gotten had I bought 1 acre out of a full 160 acre unit....again almost double.
This is interesting to think through, but I guess there is a free lunch sometimes.
However, going back to the original, real farm. Most farmers would not think of it on a "per acre" basis. They would think they paid a flat amount for an 80 acre block, and they lost 6.6 acres due to the river. Not a good or accurate way to think about it I guess.
And of course, I stand corrected on my original statement that "royalty payments would be less on a short section". Clearly not the case as you have pointed out.