NPRI INTEREST

Written by David Melton

Should they ratify an oil and gas lease?

Every petroleum landman should be familiar with a ‘Non-participating Royalty Interest.’ A simple explanation for a non-participating royalty interest owner is that they are along for the ride.


Non-participating royalty interest


In other words, a non-participating royalty interest usually means, “a percentage of production/revenue carved out of the mineral estate. This interest is typically not entitled to participate in the leasing of the lands in which the interest is resident nor participate in the bonus or delay rentals” (no executive rights). (Terry E. Hogwood at Callaw.org)



I was teaching a course at the American Association of Petroleum Landmen’s headquarters in
Fort Worth, Texas, when a student told me she was assigned a non-participating royalty interest
and wanted to know if she should ratify the lease that her interest was involved. The answer can
be short or long, and I chose the short one, “it depends.” The example shown below is what I
showed her.



According to MCZ, Inc. vs Triolo, 708 S.W. 2d 49, 52 (Tex.App. – 1986): “If the non-participating royalty interest owner’s interest is located on the drillsite tract, it may elect not to ratify the act of pooling and to take its royalty share on an un-pooled basis. If the non-participating royalty interest owner’s interest is located on a non-drillsite tract, and the non-participating royalty interest owner does not ratify the act of pooling, it is not entitled to any interest in unit production. That is, the failure to ratify the act of pooling in either case results in the non- participating royalty interest owner being treated as an un-pooled royalty interest owner.



Generally, the granting or reservation of a non-participating royalty interest by the then mineral
owner (full or partial ownership) does not carry with it the intention that the grantor of the interest intended to give to the holder of the leasehold estate (the oil and gas lessee) the right to pool said interest. To properly pool a non-participating royalty interest, whether under the drillsite tract or non-drillsite tract, consent from the non- participating royalty interest owner must be obtained via ratification of the underlying oil and gas lease (containing the pooling provision) covering the lands in which the non-participating royalty interest is owned or direct ratification of the pooled unit. (Terry E. Hogwood at Callaw.org)



When the oil and gas lessee, in accordance with the express pooling provisions of the underlying
oil and gas lease(s) pools the lease(s) under which part of the royalty attributable to such tract is
owned by a non-participating royalty interest owner, the non-participating royalty interest owner
can ratify the act of pooling: 1) voluntarily (with the lessee’s consent), 2) by acceptance of
pooled royalties or 3) by unilaterally ratifying the act of pooling by filing suit to enforce the lease
as written. (Terry E. Hogwood at Callaw.org)

Example: NPRI on a drillsite tract or on a non-drillsite tract.


Drillsite Tract:

If a well has already been drilled and it is located on the tract where the NPRI has his interest
(the NPRI owner is on a drillsite tract), it is typically in the best interest of the NPRI owner not
to ratify the oil and gas lease and thereby avoid pooling his interest with other tracts in a
vertically pooled unit. This is because an NPRI owner receives his full fractional share from the
gross production from the well located on his tract, undiluted by the pooling of other tracts in the
unit.

Non-drillsite Tract:

Where a well has already been drilled and it is not located on the tract where the NPRI owner has
his interest (the NPRI owner is on a non-drillsite tract) but the NPRI's tract is included as part of a pooled unit, it is typically in the best interest of the non-drillsite tract NPRI owner to ratify the
oil and gas lease and thereby consent to pooling his interest. Otherwise, his interest will not be
included in the unit (because his interest has not been cross conveyed), and he will not share in
production from the unit.

NPRI = 12.5% of 40 acres which is being pooled into an 160-acre unit

Drillsite Tract

Full Share if not ratified.
Diluted Share if ratified.


Non-Drillsite Tract

Diluted Share if not ratified.
Non-sharing of royalty if not ratified.

To learn more about oil and gas contracts and agreements and the petroleum landman’s role, visit
our website at www.InstituteOfEnergyManagement.com. View our course catalog and click on
Concepts of the Oil and Gas Lease.
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