Royalty Burden(s)

Received an offer for purchase and it specifically stated: “assuming there is no royalty burden that makes the royalty received less than 1/4.”

Are there operators out there that pay owners full gross 1/4? Ours takes out TX Taxes and it looks like they also absorb some of their production costs out of the gross.

Any info on common practices appreciated as I have had many offers but none stating the above.

Thanks, Jay

Severance taxes (Texas or elsewhere) are not considered a royalty burden (meaning, deduction from royalty ownership). They are a deduction from revenue share received by the payee (royalty owner). The royalty paid (“revenue”) is a gross fraction or percentage of total sales, stated directly in the oil & gas lease in the royalty clause.

Your question is a bit unclear to me, though. Is the “offer for purchase” to buy your mineral rights, or is it an offer to purchase an oil & gas lease from you? There are two possible answers, depending on which scenario.

If the offer is to buy your mineral rights (and not take a lease from you), the language would be referring to any non-participating royalty interests owned by third parties that you might not know about, who would be entitled to part of the lease royalty stated in any future lease. The offer is saying that the amount of money they are offering you is based on them being able to negotiate a 1/4 royalty lease in the future, and be paid all of that 1/4 royalty, none of it to be paid to NPRI owners (non-participating royalty interest owners).

On the other hand, if the offer is for you to sign an oil & gas lease (not to sign a deed selling your rights), the language would be protection language for the Lessee. The oil and gas lease will state 1/4 royalty in it, but the company making this offer wants to make sure you understand that you will not receive all of that 1/4 royalty as revenues if you have NPRIs burdening your royalty rights. The NPRI revenue share(s) would get paid to those other owners and you would receive only the balance.

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I will limit my discussion to Texas, since that is where the property is located. NPRI interests are taken to the extent that the royalty provided on the lease can absorb them. In that case the excess NPRI burden would be absorbed by the working interest owners.

This happens. For example, supposed somewhere in title, someone reserved a NPRI of 1/3 royalty. That is a third of what comes out of the ground, therefore a 1/4 royalty lease will not cover the NPRI.

A more plausible answer would be a lease got traded and sold with each buyer reserving a small royalty for themselves, so that the total royalty burden on the lease was 27.5%. Something that you could not control, but something that could sour the sale.

The offer was a contingent offer from what you shared with us. If the offer is acceptable, go with it and if it dies because of excess royalty, then there may other ways to complete the transaction with some good negotiation on your side.

Regards,

Buddy Cotten

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Jesse: You might try calling the party that made the offer and see what they mean. As an educated guess, they mean their offer is contingent upon you receiving a royalty on your minerals of 1/4th. They assume your minerals are leased on a 1/4th royalty lease. If the royalty is less than that, their offer will be reduced proportionately. Same goes if you have a non-participating royalty interest that is charged against your mineral interest that will reduce your net royalty acres.

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Thanks to all. Yes it was for purchase and they were worried about NPRIs. We don’t have any NPRIs on our lease and receive a full 1/4.