A non-participating royalty interest (NPRI) owner is someone who owns the right to all or a portion of the royalty from gross production but does not have the right to execute a lease. This occurs when a predecessor in title kept a royalty interest and gave the right to execute a lease to another party.
The exact words written in a deed are important and many people throughout the ages have kept mineral interest, royalty interest and various forms thereof. Errors in deeds do occur and if the original parties to those deeds are no longer with us to clarify what they meant and come to some agreement through the use of a corrective document then we are left to interpret their intentions through the "four-corners" of the document itself. The courts have determined that the legal interpretation should attempt to give meaning to each provision found in the document.
While it is true that generally a royalty interest is non-participating as it comes to expenses of developing and drilling a well, and NPRI is non-participating as it relates to executing a lease, receiving a bonus or any delay rentals. The NPRI is only due a portion of the gross revenue from the proceeds of production. (Schlittler v. Smith, 128 Tex. 628, 101 S.W. 2d 543 (1937)).
An important consideration for an NPRI holder when a well is drilled is the ratification. An NPRI cannot be diluted by the inclusion of additional tracts into the production unit IF the well is drilled on the NPRI base-lease estate and the NPRI owner has not ratified the pooling provision. An example:
The base lease under an NPRI is 40 acres. The lease is properly obtained but the NPRI does not ratify the lease. The NPRI is entitled to 12.5% (based on the reservation document and lease document) of the gross proceeds from a well drilled on the 40 acre tract. In our hypothetical, the operator needs to have 80 acres in order to drill on a legal location and must lease other tracts to form a pooled unit. The operator leases the other 40 acres and now has a legal location. The operator then drills on the NPRI 40 acre tract. If the NPRI does not ratify a pooling provision then the NPRI holder is due a full 12.5% royalty from the producing well. If the NPRI holder does ratify then the interest is proportionally reduced to accommodate the additional acreage in the lease.
Similarly, if the above situation occurs and the well is drilled on the other 40 acres and not the 40 under the NPRI and the NPRI does not ratify then they are not entitled to any of the production. The NPRI holder need not receive the ratification from the oil company they only need sign a ratification and record it, provide it to the operator and they will be entitled to their proportionally reduced interest.
An NPRI does not have the right to develop the land without the party that holds the executory rights agreeing to develop. But, once a lease has been signed the NPRI is in a pretty good position if all the steps are not followed.
Tue, April 2, 2013
by Cliff Williams filed under