NOTE: this is Part One of a series on NPRIs: “Crucial Characteristics of NPRIs from the Operators’ Viewpoint.”
Disclaimer Footnote: 1
Non-Participating Royalty Interests in General
As “oil people,” we have all undoubtedly encountered hundreds or even thousands of NPRIs. A majority of us have also probably encountered some of the many problems NPRIs can present. In the beginning of the oil and gas revolution, NPRIs were created out of an innocent and simple concept – ‘I’ll convey the minerals to you, but I want to keep a small interest in the future profits, if any.’ However, due to the ramifications underlying this nature of interest and the resulting relationship with the mineral owner and lessee, an abundant and complex body of law has developed, much of which is seemingly contradictory and convoluted. My aim with series of articles is to simplify some of the general concepts regarding NPRIs, and hopefully clear up much of the confusion.
What is an NPRI?
A non-participating royalty interest (“NPRI”) is a non-possessory right to royalty, that burdens, or “comes out of” the interest owed to the mineral owner.2 NPRIs do not arise from ownership of the minerals in place, and are not “created” by an oil and gas lease.3 Courts have further defined the NPRI as follows:
An interest in the gross production of oil, gas and other minerals carved out of the mineral fee estate as a free royalty, which does not carry with it the right to participate in the execution of, the bonus payable for, or the delay rentals to accrue under oil, gas and mineral leases executed by the owner of the mineral fee estate.4
An NPRI owner, as a non-possessory interest, is not entitled to execute oil and gas leases, and is not entitled to produce the minerals himself.5 Further, an NPRI is only entitled to his share of production proceeds, free of the expenses of exploration and production.6
This differs from the typical mineral interest owner, in that the typical mineral owner is entitled to self-develop the minerals, and will be entitled to its proportionate share of the production, less and except the costs of development. However, the NPRI owner does not have the right to self-develop, but even where the mineral interest owner chooses to self-develop, the NPRI owner is still entitled to its full share of production with no deductions for production expenses.7
To put all this in simpler words, NPRIs are merely an interest in royalty, not an interest in the minerals themselves. So NPRI owners can’t drill wells himself. But if the mineral owner drills a well himself, the NPRI owner still gets his share. This is because a lease merely defines the size or “quantum” of most NPRI’s; not whether the NPRI “exists.” Finally, NPRI’s down have to share in the “costs of production.”
Defining the Size of an NPRI
Generally, the “size” of the interest attributable to the NPRI owner can be defined in two primary ways: the “fixed fraction” (aka “fixed NPRI”), or the “fraction of royalty” (aka “floating NPRI”).
- Floating NPRI: A floating NPRI is measured by multiplying the defined NPRI fraction by the royalty rate agreed to by the holder of the executive right (e.g., 1/6th NPRI of the 3/16 royalty interest agreed to in the respective lease). In other words, it is a portion of the royalty.
- Fixed NPRI: Conversely, a fixed NPRI is measured by giving the NPRI owner his NPRI fraction of the total production. For example, a 1/6 fixed NPRI would receive a 1/6 portion of the entire proceeds of the well, lease or unit. A Fixed NPRI is absolutely independent of the royalty rate agreed to in the lease.
Any time an interest is described as a proportion of something else, problems are inevitable. This is likely due to the fact that business people try to get creative in structuring their deals, and lawyers try to get creative in avoiding known and potential legal risks. Unfortunately, creativity frequently leads to ambiguity, and courts have to get involved.
Future Installments in this Series:
- NPRI Pooling, Allocation and Ratification ( lease/unit ratification, and pooling agreements);
- The determination of whether an NPRI is fixed or floating;
- Complications arising in Horizontal Drilling;
- Community lease concepts; and
- Can an NPRI affect a lessee’s NRI?
- Neither this article, nor the series of articles on NPRIs are intended to be an inclusive or all-encompassing statement or analysis of the law regarding NPRIs, or the treatment of NPRIs by Operators. To the contrary, this is merely a list and brief explanation of some of the points an operator should be aware of regarding NPRI’s. Also, I should point out that this article focuses on the law of NPRI’s in Texas. Colorado, North Dakota and Wyoming vary very little with regards to these fundamentals, but I will be specifically discussing Texas law. [↩]
- In re Bass, 113 S.W.3d 735, 738 (Tex. 2003). [↩]
- See generally Lee Jones, Jr., Non-Participating Royalty, 26 Tex. L. Rev. 569, 573 (1948). [↩]
- Plainsman Trading Co. v. Crews, 898 S.W.2d 786, 789-90 (Tex. 1995). [↩]
- Luckel v. White, 819 S.W.2d 786, 789 (Tex. 1995). [↩]
- Id. [↩]
- See, e.g., Danciger Oil & Refineries v. Hamill Drilling Co., 141 Tex. 153, 171 S.W.2d 321 (Tex.1943) (holding that the mineral interest owner must bear its proportionate share of costs incurred after gas is severed at the wellhead when royalty is based on “market value at the well”). [↩]