Oil/Gas/NPRI and ORI
QUESTION: We own NPRI (1/4 of 40 ac) in Garfield Co. Ok leased at 1/8th, Pooled at 640ac and producing. The RI owner (granter of our NPRI) has in addition to the lease, an overriding interest of 1/8th they negotiated from the oil company one day after the lease, This overriding interest did not include the NPRI owners. We have been paid by the Oil Company to this point as if we were participating in the lease and the override (.01842213). Now, several years after production started,the oil company is demanding a new division order stating our NPRI should only be 1/8th (.00783920).
Question: Does the lessor have an obligation to the NPRI owner to include them in the Override interest. Do you have suggestions as to the proper steps to bring resolution to the situation. Thanks
ANSWER: There are two ways that an NPRI interest can be structured. You state that you own a 1/4 NPRI, so I will use "1/4" in the explanation here.
An NPRI can be conveyed/retained as a straight-forward "1/4 of all oil and gas produced and saved" or it can be conveyed/retained as "1/4 of lease royalty". If the conveyance document creating your NPRI uses the language "1/4 of all oil and gas produced and saved", then it doesn't matter how much lease royalty (or additional override) is reserved in the lease--you must be paid 1/4th of all proceeds from your 40-acre tract (proportionately reduced to the unit size). But if the language "1/4 of lease royalty" is used in the conveyance document (deed or probated will), this phrase can be interpreted two ways: (1) the first 1/4th of whatever royalty rate is reserved in the lease, or (2) 1/4 times whatever royalty rate is reserved in the lease.
The fact that the Lessor reserved a lease royalty of 1/8 PLUS an amount intended add to that amount without calling it "royalty" indicates that the Lessor most likely believes you are entitled to all of the stated lease royalty up to 1/4 and the Lessor would only get what was left over. Very, very few leases contain a royalty reservation greater than 25%. That is the most common reason that Lessors attempt to reserve an additional "overriding royalty" in their lease.
I'm sure you are asking, "why did the Lessor only reserve 1/8 when they know we are entitled to 1/4?" The answer likely could be that your conveyance document uses "1/4 of lease royalty" language interpreted as (1) above. By reserving 1/8, the Lessor got a bigger signing bonus than they would have gotten for a 1/4 royalty lease (which you weren't allowed to participate in, hence the name "non-participating" royalty) and you had to accept the 1/8 royalty rate. The problem is, an overriding royalty is carved out of leasehold working interest and some courts have ruled that because of that, it cannot be created inside the lease agreement itself. It has to be conveyed by the Lessee to the Lessor, after the lease is signed and delivered to the Lessee, in a separate document, called an Assignment of Overriding Royalty.
Although I am not an attorney, I am aware of court cases in oil & gas producing states that have ruled that such a reservation is NOT an overriding royalty, but rather, it is an additional royalty. Since this so-called override was reserved in the lease itself, most companies (and title attorneys writing the revenue distribution title opinion, called a Division Order Title Opinion) consider it to be an additional amount of lease royalty, of which you would be entitled to share up to a combined total of 1/4.
I recommend that you question the oil company first, to ask why they are changing their position on the interpretation of your NPRI and its application to ALL royalty reservations of whatever type in the lease. Ask specifically if there was a Division Order Title Opinion rendered for the unit when it first began to produce. Ask to receive a copy of ONLY those pages or parts of pages of it discussing the attempted overriding royalty reservation in the lease, without divulging the attorney name or contact information. It is quite likely that the Division Order Title Opinion credits you with all of the lease royalty reservation plus all or part of the attempted override reservation, and that is why you were paid that way all this time.
If the new division order was merely a recent management decision to change how the "override" is paid (e.g., someone decided to re-interpret the language in your deed and/or the lease), you would be wise to consult an attorney board certified or experienced in oil and gas law to help you further, especially if the company issuing the new division order refuses to give you a copy of only the pages of the title attorney's opinion on how to pay the lease royalty and additional "override". At the very least, do not sign and return the division order without talking to an attorney first. Good luck, I wish you the best.
---------- FOLLOW-UP ----------
QUESTION: Thank you for your response, it was most helpful. I have three follow up questions:
1.The mineral deed does read, "one-fourth interest in and to all of the oil, gas and other minerals in and under and that may be produced from the following described lands". However the title opinion recently done and the only one USEDC the oil company will provide, states, "we have construed this term interest as entitling this trust to 1/4 of the 1/8th royalty reserved by the lessor". Question: From your prior opinion, I assume the deed gives us a 1/4 interest to the 40 ac of royalty and USEDC is trying to tie it to the lease. Any suggestions for a response to USEDC. Any suggested cases that address this miss interpretation?
2. The mineral deed further states, "The grantee shall participate only in the minerals so conveyed when and as produced". Question: can it be inferred this is suggesting we would be paid first from the royalties paid.
3. The override was delivered to the lessee by the mentioned Assignment of Overriding Royalty and not through the lease. Does this change your opinion as to it being additional royalty we would have a right too? You speak of case law ruling overriding royalty as additional royalty, can you provide them.
This site and your contributions are indeed a blessing to mineral owners, we thank you.
Thank you for the additional information, it definitely helps. Based on the language from the deed that you recite, most title opinions I have worked with during my 35+ year career have interpreted this to mean that the NPRI owner should receive 1/4th of the royalty rate stated in the lease.
As for #2, no, first payment is not implied. The #2 statement language you recite is interpreted by title attorneys to mean that executive rights were not conveyed. No executive rights means that the Grantee would not have the right to participate in the negotiation, bonus payment, or rental payments related to an oil and gas lease, and would have no authority to sign an oil and gas lease. This kind of royalty interest is called a "non-participating royalty interest" or NPRI for short.
As to #3, the case law rulings I have seen referenced in title opinions apply only when the overriding royalty is reserved as a special provision in the oil and gas lease itself. You state here that the overriding royalty was, in fact, assigned by the Lessee to the Lessor in a separate conveyance document, an Assignment, which makes it a true overriding royalty interest. A true overriding royalty interest is not really a royalty at all. It is a small piece of working interest carved out of the bigger working interest owned by the Lessee (who was conveyed and received 100% working interest when the lease was signed and delivered), but that small piece of working interest will never pay any part of the costs of exploring, drilling, completing, or producing any well drilled on the leased lands or lands pooled with the leased lands. The working interest out of which it was carved will always pay those costs on behalf of the overriding royalty interest. Because the override was conveyed by a separate document, technically the NPRI owners would not be entitled to any part of it. However, that said, the separate Assignment document makes a strong case that the Lessor who signed the lease wanted to receive a larger share of royalty than he/she would have received from just 3/4ths of 1/8th lease royalty in a way that would prevent NPRI owners from receiving any additional royalty. Again, a 1/8th-royalty lease would have maximized the amount of bonus payment and annual delay rentals (probably pre-paid along with the bonus) paid to the Lessor, which would not be shared with the NPRI owners.
I'm glad you posted a follow-up question containing specifics so I could give you more precise advice based on your specific situation. General questions result in general answers which might, or might not, apply to the specific situation at hand. I still think you should follow up the matter with qualified legal advice. You need to find out from an oil and gas attorney whether the "on-the-side royalty agreement" by way of the Assignment of Overriding Royalty constitutes breach of implied fiduciary duty possibly owed to NPRI owners by executive mineral rights owners, under Oklahoma law. Good luck.