15 Apr NPRIs and Pooling… by Christopher W. Lawyer

It is well established in Texas, and in other states, that a mineral interest is more than a singular interest but rather is made of what is often referred to as a “bundle of sticks”. Each “stick” represents a part of the greater mineral interest.  These “sticks” include the executive right, which is the right to execute an oil and gas lease, the right to receive bonus payments, the right to receive delay rentals, and the right to receive royalty payments under a lease.  The holder of the royalty interest has the right to receive a fractional share of production under a lease.  Although much of the time this “bundle of sticks” are held together with the owner of the minerals under a given tract of land, they can be, and often are, conveyed out separately, with each portion of the mineral interest going to a different person.

Non-Participating Royalty Interest

One such severed interest that is carved out of the right to receive royalty payments is referred to as a non-participating royalty interest (“NPRI”).  An NPRI is created by a reservation or a grant and allows its owner a share of the royalty interest received under a lease, but it does not confer the owner the right to enter into or execute an oil and gas lease.  An NPRI owner is essentially “along for the ride” with the holder of the executive rights having the right to enter into a lease. However, the holder of the executive rights does have certain duties it owes to the holder of an NPRI.

Royalty Interest Payments

Receiving payments under a lease was more straightforward in the past when vertical wells were drilled on individual leased tracts. However, with the rise of horizontal drilling and pooling, things have changed. In order to minimize the number of wells drilled and more efficiently develop leased acreage, two or more tracts of land, often owned by different parties, may be combined in what is known as pooling.

While pooling benefits the exploration company drilling the well, it can result in the royalty interest payments, including the NPRIs, being diluted or reduced. This is because royalties in a pooled unit will be calculated based on the number of acres covered by any one lease in the pooled unit in relation to the total acreage of the pooled unit.   For example, if a pooled unit covers 320 acres, and the lease under which an NPRI is owned makes up 80 acres of that pooled unit, the royalty paid will be based on the lease royalty rate x (80 ÷ 320).

To Pool or Not to Pool?

To prevent an NPRI owner’s interests from being diluted or reduced, generally, an NPRI owner’s interest may not be pooled without the owner’s consent.  Should an NPRI owner consent to have their interest pooled?  This question is dependent upon where a well is to be drilled in the pooled unit.  If a well is to be drilled on the specific tract under which an NPRI is owned, i.e., the drillsite tract, then it may be in the interest of the NPRI not to pool. This will result in them being paid on the full royalty percentage,  undiluted by pooling.  However, if the well is to be drilled on a tract under which the NPRI is not owned, failing to consent to pooling will result in the NPRI receiving no royalty payments at all. In such case, it would be best for the NPRI to consent to pool and be paid on a diluted or reduced basis.

Acquiring mineral interests can be quite lucrative but determining the type of mineral interest you have and the decisions to be made about said mineral interest when it comes to entering into an oil and gas lease, or your rights thereunder, can be complicated.  It is always advisable to consult with an oil and gas attorney to help navigate you through the myriad of choices available to you.  The attorneys at Kearney, McWilliams & Davis, PLLC, have extensive experience in oil, gas and mineral law in numerous states and are happy to consult with you about any questions you might have regarding your mineral interest.

Written by Christopher W. Lawyer, Senior Attorney at KMD Law