Ratifying a Lease or Unit with a NPRI interest -- Revisited

An interesting situation hit my desk 2 weeks ago.

The property is located in Texas.

My client owns a Non-Participating Royalty Interest of 1/3 x 1/32, or a decimal interest of .010416667.

The Operator wanted my client to ratify 5 separate leases where our NPRI burdened the lease. The total NPRI covered around 2100 acres. One of the leases provided for a cost free royalty, the others did not.

Here you are going to have to follow with a pencil and paper.

The proposed wellbore was about 5000 feet from first take point through terminus. My client owned in almost exactly 80% of the wellbore.

So, without ratification, on a 1700 acre unit, my client would be entitled to .8 x .010416667, or .008333333.

The leases contributed approximately 74% of the 1700 acres unit. Therefore, if we ratified, we would be entitled to .74 x .010416667, or .00778333.

Generally speaking, I like to ratify and encourage exploration. Here is what we negotiated in this case.

Rather than ratifying the leases as to the entire 2100 acres wherein we had an interest, we ratified for pooling only on the initial unit formed for the initial well. That keeps our options open on wells outside the initial unit, but allows us to participate fully in densifying wells in teh initial unit.

Here is the kicker.

We negotiated, in exchange for our ratification, a cost free royalty, penalty for not paying promptly, access to records, including audit rights and full well data.

The Operator quickly accepted this transaction. Given the high continuing costs of producing horizontal wells (especially the hauling of water in this formation), we actually came out quite well.

Consider this strategy when you are placed in a situation such as this.

There is a key part of the puzzle left out, concerning ratifying a lease that covers more lands than your NPRI burdens. I will address that in another blog post.


Buddy Cotten