NPRI's Impact on Royalty Interest

Landman Discussion
1

I have a situation wherein Party 1 who owned 640 surface acres but only 520 Mineral Acres (and 520 RI) gifted 2/3rds (total NPRI = 346.666667) of his Royalty Interest equally to 7 children herein called Party A in the aggregate (each of the siblings received 1/7th of 2/3rds NPRI). 3 yrs after the gifting, Party 1 died leaving his 520 Mineral Acres to his wife, Party 2. Am I correct in calculating that Party 2 now owns 520 MI but only 520 RI minus the 2/3rds NPRI (520 X ⅓ = 173.333333 as her RI)?

About 15 yrs later Party 2 sells her 640 surface acres and transfers ⅓ of her MI to the new owner, Party B. Am I correct in calculating Party B’s MI as 520 x 1/3rd or 173.333333 MI but Party B’s RI as 173.333333 x 1/3rd or 57.777778 RI? That would leave Party 2 with 520 - 173.333333 = 346.666667MI and 173.333333 - 57.777778 = 115.555556 RI, Correct?

12 yrs after the sale of the land which includes the ⅓ MI to Party B, Party 2 dies and leaves her remaining MI and RI as follows: 91% to Party A (each of the 7 siblings = 91% x 1/7th or 13% of the MI (13% x 346.666667) and 13% of RI (13% x 115.555556); the remaining 9% of Party 2’s mineral estate was given to Party C (9% x 346.666667MI) and (9% x 115.555556RI), Correct?

This is a Montana property and I can find no case law that is comparable.

Your input would be greatly appreciated.

2

An NPRI is a non-participating royalty interest and it is usually a royalty interest retained or granted in a sale. For example, Owner sells his minerals and retains a 1/64 royalty interest in the minerals. This determines the royalty decimal that Owner will receive if the minerals are leased by the Buyer. This 1/64 is a burden on the buyer and reduces his royalty decimal under a lease. Here it appears that you are talking about ownership of net mineral acres. This is the gross acres in which A owns a mineral interest times his interest. If there are 640 acres and A owns 1/10 minerals, then A own 64 Net Mineral Acres. A still has the ability to lease his 64 NMA at whatever royalty he can get (1/8; 3/16; etc). If that is the case with your scenario, then you are trying to determine how many net mineral acres each heir owns. They can lease together (for more strength and better terms) or each can lease separately.

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3

I understand what you’re asking, but you’re conflating acres and interest. Interest is a percentage representation. You can use a mix of fractions, decimals and percentages when calculating this. I’m going to use percentages. I’m not going to do net royalty acres because that is a different kind of calculation used to value royalty interest. Your interest needs to add up to 100% at all times, and your gross acres need to add up to the total gross acres in your section. I’ve included unknown owner to avoid confusion with the previous statement. If you add MI with MI it will equal 100%, RI with RI will equal 100% and you will include the MI of unknown owner in this calculation, and acres will equal 640, more or less, at all times. The decimals will fluctuate the numbers slightly:

520 mineral acres in a 640 acre section:

Party 1 owns 81.25% MI, or 520 net mineral acres (NMA) [Unknown owner: 18.75% MI, 120 NMA]

2/3rds of his Royalty Interest gifted:

Party 1 now owns 81.25% MI, 27.083333% RI, he still owns 520 NMA.
7 kids get 1/7 of 2/3 NPRI each = 7.738095% RI each, 54.166667% RI TOTAL [Unknown owner: 18.75% MI, 120 NMA]

NOTE: you confused me with your wording. You originally said he gifted 2/3 of his Royalty Interest, then later said the kids each received 1/7 of 2/3rds NPRI. Those are two different things. I am assuming you meant 2/3rds of Party 1’s RI, and not 2/3rds total.

Part 1 leaves all interest to Party 2. Party 2 sells 1/3 of her MI to Party B:

Party 2: 54.1666667% MI, 18.055556% RI, 346.666667 NMA Party B: 27.083333% MI, 9.027778% RI, 173.333333 NMA 7 kids still have 1/7 of 2/3 NPRI each = 7.738095% RI each, 54.166667% RI TOTAL [Unknown owner: 18.75% MI, 120 NMA]

Party 2 dies, leaves 91% equally to 7 kids, 9% to party C:

Party B: 27.083333% MI, 9.027778% RI, 173.333333 NMA 7 kids: 7.041667% MI, 10.085317% RI, 45.066667 NMA each, (OR 49.291667% MI, 70.597222% RI, 315.466667 NMA total) Party C: 4.875% MI, 1.625% RI, 31.20 NMA [Unknown owner: 18.75% MI, 120 NMA]

Hopefully that cleared something up for you. You were using acres as a representation of royalty interest. You can still do that with the royalty interest percentage multiplied by gross acres if it makes it easier for you to visualize. I didn’t do that here since the only term I could think to call it was net royalty acres, which is a term used for a different kind of calculation, and I didn’t want to confuse people. Basically just remember, at all times, all interest needs to add up to 100%, and if you’re using acres, they need to add to the gross acres in your tract. Let me know if you have any questions. I can send you the formulas if you need. This post is already too long.

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4

@TennisDaze , what happens if the executive rights owner can not be located and/or will not sign a lease? Does the NPRI owner have any right to claim a royalty interest carved out of the unleased mineral interest acting as a working interest? Also, would it matter if the NPRI was fixed vs floating in this case?

5

Thank you for walking me through this convoluted maze!

However, I must make the following comment: the term “Royalty Interest” gifted to the 7 kids was taken directly from the transfer or gifting deed. In other parts of the deed it was clear that Party 1 was retaining his rights to retain negotiation powers over leasing activity and to he and his wife (Party 2) continued to receive said bonuses. It was for that reason that I called the gifted interest to the 7 kids a NPRI not a RI.

It’s my intent to leave each of the parties an Excel Spreadsheet showing and defining their MI, their RI and their NPRI so that in future generations they can determine their leasing/bonus rights and once developed their Total Royalty Interest (Sum of NPRI + RI)

Thanks again for your assistance in this matter.

6

The NPRI in this case was a gift from Party 1 to 7 children. Party 1’s statement that he was gifting 2/3rds of his “Royalty Interest” has been a confusing terminology…unless one reads the Gifting Deed in its entirety. In other parts of the Deed, Party 1 makes it clear that he is retaining his Mineral Interests (NMA) to maintain control of the leasing negotiations and receive associated bonuses. It is for that reason that I’ve tried to maintain separate values for the NMA, RI and the NPRI.

It’s my intent to clarify this convoluted mess for all parties once and for all time!

Thank you for your help in this matter. It is much appreciated.

7

I hate to be a bother but it’d be helpful if you could clarify how the calculus would change if the royalty was to be calculated as a NPRI not a RI? It may help if you could send me the formulas for each…

Your efforts are greatly appreciated.

8

If someone owns 100% MI burdened by a 25% NPRI, and another has the 25% NPRI, they’ll both get 100% of the royalty rate in the lease total. If the royalty rate in the lease is 1/4, then the MI gets 75% of 1/4, and the NPRI will get 25% of 1/4. However, the MI owner will get 100% of the bonus that was paid for the lease. That’s the only real difference in the value of owning MI and not NPRI. MI gets to sign the lease and get paid bonus and NPRI doesn’t. When it comes to who gets paid what, it’s just their royalty interest percentage times the royalty rate.

9

This may differ based on the exact wording of the deed creating the NPRI and the interpretation and application of state law. Sometimes the NPRI owner is restricted leasing rights, but will receive the bonus. Some NPRI are fixed, rather than floating, and remain the same regardless of the royalty rate specified in the lease. For example, the NRPI could be 1/8 or it could be 1/8 of the royalty. It is best to have an oil and gas title attorney familiar with the law in the state where the minerals are located review the deeds.

10

Responding to ABond re your calculations regarding NMA, MI, RI back in May 2019! This particular lease has been litigated. However, the value of the RI for the 7 kids in the “Party 2 dies, leaves 91% equally to kids, 9% to Party C” was declared incorrect, however, all other values were accepted!

I was wondering if you could send me your calculations.

I appreciate your help in getting this right!

11

Calvin,

I need to familiarize myself with this again. I’ll look at it tonight. Just wanted to let you know I saw your reply and will get to it when I get a chance later today.

13

I just want to make it clear: this property is no longer being litigated. All parties settled in August 2019.

However, it is my hope to clarify the calculus so that I can incorporate same in a spreadsheet and pass this along to the next generation…

14

I received your note and appreciate your interest in revisiting this issue(s).

I’m going to clarify some things that were in my early statement and that you picked up on:

–1. Language in the original gifting deed was that Party 1 “Gifted 2/3rds of his Royalty Interest then owned”.

–2. The NPRI language was completely foreign to me but was first used by the Lessee in the Division Order that I received but never signed back in 2012…because of numerous errors.

–3. Party B as Lessor has a Lease with 19% Royalty and is the present surface owner

–4. 7-kids as Lessors have Leases each with 20% Royalty

–5. Party C as Lessor has a Lease with a 20% Royalty

–6. There are two other parties having a Mineral Interest in this section: Party Y: 40 ac 100% and Party Z 80 ac 100%. That’s the reason for the Party 1 having an 81.25% MI and an NMA of 520 ac.

–7. Party B has no interest in the other section.

The litigation on this issue was settled in August 2019 but I feel that I do not understand the calculus involved and I’d like to do so for the sake of future generations and/or possible purchasers.

Please let me know if I should just hire a consultant on this. Five years of dealing with an unresponsive Lessor/Operator and the tedium of the courts has me totally spent. I’d like to get this off my plate. Thanks…