NPRI Royalty Interest

Division Orders
1

ANY Advise or suggestion would be greatly appreciated!

I have a 1/5 of 1/16th Royalty Interest in Karnes County, TEXAS and THERE IS a producing horizontal well on my tract. I have the DO (division order) for pooling and recently was provided a DO for non-pooling. Please note that I do understand that if I don't agree to pool then I will not be paid for any production of wells that do not cross my tract.

I had requested 100% of my Royalty Interest, or .0125 in this case and here was the Oil companies response: "You have correctly stated your Unit tract interest of .0125 however you must apply a tract participation factor (in this case it will be the amount of wellbore lateral that traverses your tract divided by the total wellbore length) to this number to get your correct Interest in Total Production."

Basically they noted that the treated lateral length is 5788 (I assume feet) with 897 of that lateral on our tract so they state we are entitled to essentially 15%, and not 100%, of our royalty interest.

I know that if this were a vertical wellbore in our tract I’d be owed the full 100% and everything I've read seems to indicate there is no "black & white" rule for what we are owed on horizontal wellbores.

My question for anyone is, what are oil companies generally paying out to NPRI Royalty Interest holders on horizontal wellbores and as I understanding it I have a Fixed NPRI so all of my royalties should have no production costs taken out of it.

Should I go back and reject their 15% and ask for a little less than 100%, say 85%? Is this up for simple negotiation or should I expect them to stand firm on their offer based on their calculations? Are people suing the companies to get more using the older vertical drilling expectations and if so, who’s winning?

So basically what I’d like to know: Is the way they did the calculations fair & reasonable and acceptable in the oil & gas world of horizontal drilling, or should I demand a higher percentage, and if so, what do you think the odds are of getting that?

Also, I have a concern that if they drill other wells that traverse our tract they will put in deliberate NPZ (non-perforation zones) on our tract to keep from paying us. Has anyone ever heard of oil companies doing this? Lastly, while I can find the plat on the Texas RRC site, it does not tell me the exact length of the wellbore nor how much traverses my tract. Is there a way to find that out?

THANK YOU!!

2

Dear Karen,

If I understand your question correctly, then the oil company is correct. In Texas, on a horizontal wellbore, the only way that you would not have an undiluted NPRI is when your NPRI is under each foot of the horizontal from first take point, until terminus. At least, that is my understanding.

I would love for one of our Texas attorneys to jump in at this point.

Many times, interests are pooled where the wellbore does not cross that tract. However, if you do ratify the unit in its entirety, then your NPRI would be spread over the unit AND if additional wells are drilled within the unit, you would share in those -- whether the wellbore crossed your tract or not. That is one of the proponent positions of ratifying an unit agreement.

3

Hi Buddy,

Thank you so very much for responding! Do you think one of your forum attorneys will confirm your position? I'd love if they could as I can then move on with my final decision!

And yes, I am aware that if I don't pool I'm essentially putting all of my proverbial eggs into one basket, namely my small tract, and will not be paid for any wells drilled outside of my tract. But, the reality is is that the percentage of payment for the well on my land is much higher than pooling, so the question then is, which way to go? I will be taking all of that into consideration with full knowledge that one cannot know the future and just wanted to be sure if I am able to negotiate an even higher division order or not.

If an attorney does kindly respond I want to further ask if I have 48 months from the first month of production to decide whether or not to pool?

Lastly, have you ever heard of an oil company deliberately putting non-perforation zones in horizontal wellbores on tracts where the royalty interest holder did not pool so they could deliberately keep from paying that higher royalty?

Thanks so very much!