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Oil/Gas/Non- Participating Royalty Interest

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QUESTION: Hi Marsha I have a question on NPRI.I have a judgment from the court of Wise county Texas stating and I quote. This will be a long statement we were given  interest in the judgment. One paragraph states plaintiffs shall have no right to execute any future oil, gas and mineral lease or join in the execution thereof, nor to receive any portion of the consideration paid for the granting or continuation of any such lease, which said rights of execution of lease and receipt of bonus and rentals shall be held and vested in Mr. Menn to the extent of one-half 1/2, and Mrs. WALKER to the extent of one-half 1/2 as her separate estate. My question is could this statement mean that the interest is NPRI or royalty Interest. I have read the definition of Non Participating Royalty Interest and both statements are the same. Could you help us on this. Thank you.

ANSWER: A non-participating royalty interest (NPRI) is a type of royalty interest.  It is called an NPRI because it does not participate in any of the signing bonus payment, rental payments, either for the original lease or any extension of it. An NPRI can only be created by a Deed creating and conveying it to a Grantee, or a Deed creating and reserving it to the Grantor, or a probated Will that creates and wills it to a named beneficiary. The other type of royalty interest is the royalty interest attached to mineral rights as part of mineral rights ownership.  A minerals rights owner has the right to negotiate and sign a lease, receive signing bonus, rentals, and extension bonus payments if any, and to be paid the royalty rate reserved in the lease.  BUT, the royalty paid to the mineral rights owner is reduced by any outstanding NPRI.  In other words, the NPRI is paid out of the royalty rate reserved in the lease.

The court order you discuss here is telling you that it declares and orders that the mineral rights are owned 1/2 by Mr. Menn, and 1/2 by Mrs. Walker.  There must have been a questionable document at the courthouse that caused the court action, to declare the NPRI part and the mineral rights part. Menn and Walker are allowed to negotiate a lease that has a royalty rate large enough to pay you your NPRI amount that runs with the land, and have some left over to pay to each of them a part of the leasehold royalty.

To clarify a little more, an NPRI is not created by an oil and gas lease.  It can only be created in record title in the courthouse.  It sits dormant until an oil and gas lease covering the land containing the NPRI is signed, drilled, and begins to produce.  At that time, the NPRI owner must be paid their full courthouse share of royalty from the well.  The NPRI is deducted from the amount of royalty reserved in the oil and gas lease, and the signers of the lease (mineral rights owners) only get their proportionate share of what is left over.

One last piece of information that you need to know about your NPRI.  Texas courts ruled long ago that an NPRI owner cannot be pooled into a pooled unit without their permission.  Since they did not sign the lease, they did not sign agreeing to the pooling clause in it.  So the courts said this: (1) if the NPRI owner's tract is OUTSIDE the drill site tract but inside the pooled unit area, the NPRI owner must either ratify the lease or ratify the pooled unit for them to be entitled to be paid any royalties at all from the production; and (2) if the NPRI owner owns their NPRI inside a drill site tract, and they have not ratified the lease or the unit, they are entitled to their full NPRI share of all production from that drill site tract--it cannot be proportionately reduced by the number of their tract acres divided by the total number of pooled acres.  When an NPRI owner signs a lease ratification they are entitled to receive a type of signing bonus for signing that ratification.

Example: Minerva owns a 1/16 NPRI in a 40-acre tract. The tract gets pooled into a 320-acre unit, but the tract is not the drill site tract.  Minerva must ratify the lease or the unit agreement to get paid 1/16 times 40/320 or 0.00781250 RI.  But if the 40-acre tract IS the drill site tract and Minerva does not ratify the lease or unit agreement, Minerva must be paid 1/16 of 100% or 0.06250000 RI of all production coming out of the wellbore.  An NPRI owner must ratify the lease before the oil company ever decides to form a pooled unit, otherwise the oil company can get sued by partners who own a part of the lease covering the drill site tract. The oil company usually will move the well to a new drill site tract if an NPRI owner refuses to ratify the lease. And Minerva will only be asked to ratify the unit agreement if her tract is outside the drill site, so if she doesn't sign she never has to be paid.

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QUESTION: Marsha thank you for all of the information. I have a couple more questions on NPRI. What should I do if the gas and oil company had been paying RI instead of NPRI? Next can interest owners have both NPRI interest and RI? My family has always been paid RI. I believe it should have been NPRI. This judgment was order in 1954 in Wise county Texas. Again thank you so much for your help.

ANSWER: I'll answer your questions in the order you ask them.  It's okay if a revenue check remittance has "RI" on it instead of "NPRI" or "NR".  It just means that their computer database system allows only one code for a royalty-type burden, and they use "RI".  That doesn't make the payment incorrect or make your NPRI a RI instead.

Interest owners commonly have both NPRI interest and RI.  This can happen a variety of ways, such as by a mineral rights owner buying out one or more NPRI owners that would otherwise be deducted from their lease royalty interest, or by inheritance where a grandchild who was bequeathed an NPRI by one grandparent later inherits part of the mineral rights (and royalty rights) from a parent.  These are just two examples of the many, many ways that an owner can come to own both a RI and an NPRI in the same tract of land.

Just because the oil company paid you using the designation "RI" that doesn't mean that they changed the nature of your property ownership from an NPRI to a RI.  It just means that they are not paying attention any longer to the fact that unless the owner(s) of your NPRI interest ratified the lease way back when, the NPRI owner may or may not be entitled to receive royalties in a current well drilled to a different depth on the same lease.

It sounds like the 1954 judgment order was obtained to put to rest forever who has the right the negotiate and sign leases, and who only has a right to collect a royalty once the property begins producing. Whoever obtained their royalty rights through Menn or Walker have the right to sign their own lease covering their share of mineral rights.

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QUESTION: Marsha, I need to ask if we have non-participating royalty interest should the gas and oil company be taking out gathering cost, compression cost all post production cost on our interest. Thanks for the help.

Answer
Post-production costs (the deductions you are talking about here) are only deducted for gas, not oil.  The answer to your question is "no" ONLY if a previous owner of your NPRI interest has ratified the lease (or if you did), and ONLY if the lease contains what is known as a "cost-free" clause that expressly states that no costs for the gathering, transportation, treating, marketing, dehydrating or any other post-production costs can be deducted.  A lease that states royalty is to be paid "free of cost at the wellhead" means free of pre-production costs, but must bear its share of post-production costs.  There has to be a special clause that says no post-production costs can be deducted.

If a previous owner of the NPRI that you now own ratified the lease before you began ownership of the interest, you are bound by that ratification, as if you had signed it yourself.  Your royalty is subject to the language of that lease, including whether or not post-production costs can be deducted.  However, if the previous owner of the NPRI did not ratify the lease, or if they only ratified the Declaration of Pooling agreement, you must bear your share of post-production costs even if the lease covering your tract does contain a cost-free clause.

Once gas is produced at the wellhead to be sold, your royalty share of it becomes your personal property and as such, you are responsible for all of the costs associated with making your royalty share marketable and getting it to market.  A special clause in the lease saying that your royalty is not supposed to bear any of those costs just means that the oil company has agreed, as Lessee, to pay those costs on your behalf.

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Marsha Breazeale, M.Ed., CDOA, CPLTA

Expertise

All questions regarding division orders; ownership decimal calculations; title ownership and payer record changes (testate/intestate inheritance; deed; assignment; court order); oil and gas lease analysis for record-keeping and purposes of payment by operator or payer; pooling, horizontal wells, horizontal well allocation units; unclaimed property reporting; royalty owner relations questions. All questions concerning administration of surface land contracts and payment questions, such as for Surface Right-of-Way, Sub-Surface Right-of-Way, Easement, Surface Use Agreement. All questions regarding industry-standard and company-specific policies that affect land owners.

Experience

Sr. Staff Division Order Analyst. Certified Division Order Analyst (CDOA, National Association of Division Order Analysts) and Certified Lease Analyst (CPLTA, National Association of Professional Lease and Title Analysts) with 35 years of experience as a combination division order analyst and lease analyst in exploration and production in the oil and gas industry.

Organizations
National Assoc. of Division Order Analysts (NADOA), National Association of Division Order Analysts (NALTA), American Association of Professional Landmen (AAPL), American Society of Trainers and Developers (ASTD)

Publications
"How an Oil & Gas Exploration & Production Company Operates" and "Principles of Oil & Gas Lease Analysis: Standard Clauses", Oil Patch Press; Articles in NADOA Magazine; LandFocus EDU Professional Training Manuals

Education/Credentials
B.A.in Management from Our Lady of the Lake University in San Antonio; M.Ed. in Instructional Design from WGU Texas.

Past/Present Clients
Past 15 years: GeoSouthern Energy Corporation; Contango Oil Co./Crimson Exploration & Operating Inc.; Apache Corporation; BP America; Marathon Oil; Newfield Exploration

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