Oil & Gas

Published: Sep 19, 2022 | Updated at: Sep 19, 2022

Are you struggling to work out the interest in your oil and gas lease?

Or perhaps you're struggling to work out what type of interest would benefit you the most. You're not alone, as this is a topic that can confuse even the best land attorneys. Especially given the ever-evolving language of land leases and contracts.

It doesn't have to be this way; we can help! Keep reading for the difference between non-participating royalty interest (known as an NPRI) and non-executive mineral interest (referred to as a NEMI), so you know what to expect.

What is a Mineral Interest?

This refers to the interest created once you separate mineral rights from that of the surface estate. By separating the mineral rights you create a fee-based interest. You do these usually through legal conveyancing or via a contract.

A mineral estate owner will hold NEMI (non-executive mineral interest). This includes the executive right to enter into a lease and drill for minerals. It also includes reasonable surface rights too.

Then there are holders of overriding royalty interests (ORRIs). They're entitled, during the period of a lease, to a share of the production profit made from the minerals.

Where it can get confusing is the fact that there are a lot of ways to create ORRIs. These include deeds or conveyances, but that is by no means an exclusive list.

These may give bonus, delayed, and executive rental rights as well as lease agreements. But an ORRI holder will not have any executive mineral interests.

There is a wide variety of royalties and mineral interests that it can fast become a legal quagmire. Each type will set the amount of leverage that the holder has on the land and the minerals found there. It also determines how much they'll get from the extraction and sale of that oil and gas.

What is Non-Participating Royalty Interest?

NPRI oil and gas agreements are interest in mineral production on land that bears no cost. As a landowner, you can sell your property and still keep your stake in the mineral profits from it. In essence, with an NPRI, the royalty is as removed from the minerals as the minerals are from the land.

Unlike mineral owners, non-participating royalties won't have executive rights in:

  • Rental payments
  • Lease negotiation
  • Lease incentives

All they do is receive the proceeds from actual mineral production. For example, say an oil company is planning a drill site, and the landowner is sure the oil or gas is there. The mineral owner, in this scenario, needs extra funds to fulfill an obligation on their end.

This obligation is of immediate concern, but the well is not producing yet. As such, there are no royalty checks coming in.

What the landowner can do is carve a small percentage out of their royalty. In return, there is a lump sum paid up to fulfill that obligation. When that well starts to produce, the holder of the NPRI will get a percentage of the royalty interest.

This scenario presents and win-win for all involved as everyone walks away happy. Though every circumstance will differ, you can see how NPRIs can step in to fix a range of problems.

What Is Non-Executive Mineral Interest?

NEMI is when the mineral interest owner gives up the right to lease out the interest. The owner still has the right to their share of the proceeds from any bonus or royalty paid on the mineral lease.

Sometimes in oil and gas, parties find it better to give the executive rights to a certain person over another. For example, a landowner may give the whole surface but keep (undivided) one-half interest.

This may be because both parties believe it's best for the new surface owner to negotiate the lease terms. This could be down to many factors including:

  • New owners' proximity to the land
  • Land accessibility issues
  • Their entire ownership of the surface rights

So, the seller makes it clear in conveyancing that they give the right to execute leases for oil and gas. What makes it more complicated is the fact there are then two types of non-executive interest.

The Two Types of Non-Executive Interest

Let's take a deeper look into the two types of non-executive interest that are common in these deeds.

Royalty Interest

This is the right to part of the profits without exploration or production costs. These royalties can be in perpetuity or last the duration of an existing lease. In the event it's a perpetual royalty, they do not have the right to:

  • Explore
  • Develop
  • Grant leases
  • Receive bonuses or rent

From any lease that the executive right holder executed.

Non-Executive Mineral Interest

This is like royalty interest but you get a share of rent and bonus income from the lease. But there is a catch! A conveyancing sub-document could exclude the NEMI from those incomes. Or in some cases, it could state you'll get shares in the rental and bonus, but not any royalties.

Which type a party intends to go for may not always be clear based on the language in the grant or reservation. By defining the types of interest, it is the court's intention to make certain both parties' intent. This should be, as much as possible, done inside the document drawn up.

NRPI vs NEMI: What's the Difference?

With the growing sophistication of landowners, the deeds grow more complicated. This raises the chance that the text won't have the same legal definition one party wants them to have.

By their dictionary definitions, the difference between royalty and mineral interest is clear. Mineral interests have five rights that are severable as it's whole:

  • To develop
  • Executive right (grant leases)
  • Bonus payment
  • Delay rentals
  • Royalties

Royalty interests merely refer to the landowner's production share. As stated already, this is free from oil and gas exploration and production costs.

NPRIs are a non-possessory interest. This means the owner can't extract the minerals themselves. There is none of the above rights except that of royalties unless stated otherwise.

The concept of their distinction, too has a clear definition, but in practice, it gets trickier. For example, say you have a grant that gives an undivided mineral interest of 4/16. It later conveys executive rights as well as the right to receive delayed rentals.

Questions this example raises are first, what rights does the grantor keep? Does the grant also give the right to bonuses as well as delay rentals? What is the significance, and how does it affect operators who now must pay each party their fair share?

If the grantor retains an NPRI or NEMI must be clear, as this plays a huge part in total monies entitled to the party. If someone has a 4/16 NPRI, then they own 4/16 of the mineral production.

If the party owns a NEMI of 4/16, in reference to their royalties, they own 4/16 of that total royalty from the lease. If that is then a 1/5 royalty, this works out at a 4/16 share of 1/5. In total, this amounts to 1/20.

What Does the Law Say?

Now we've established the definitions and the functionality of NPRIs and NEMIs, let's look at where the law falls. We'll use Texas as the baseline for legal cases that add some clarity.

NPRIs

The Supreme Court of Texas seems to help clear things up a little. It seems to rule that mineral interest with all rights removed apart from royalties is NPRI.

Let's look at the Watkins vs Slaughter case as an example. This deed conveyed 15/16 mineral interest. It then gave a 1/16 interest in all gas, oil, and minerals, both surface and subsurface.

It stated though, that the grantor won't get any rental money shares from future leases. The grantee would have authority on leasing and receive the rental and cash bonuses. The grantor will only get their royalty stated from actual mineral production.

It was upheld that it was a royalty, noting the reservation mentions of the royalty within. The grantor only got royalties from production. The grantee had executive rights, bonuses, and rental incomes.

NEMIs

On the other side, most cases falling into the mineral interest camp had complexity. They often referred to interest that included another part of the mineral estate. Take the Altman vs Blake case, for example.

The grantor left out the executive rights and the right to delay rentals from the deed. They did grant the right of access to explore and produce. The deed also left out the term royalty in its entirety.

It was upheld that this deed provided a mineral interest. The difference is that two of its five attributes were not granted as opposed to mineral interest as a whole. Remember, these attributes are severable from the whole and each other.

The General Rule

Each document is unique, and this trend only seems to keep growing. As such, each one must be looked at on its own merit. The Supreme Court of Texas, though seems to follow a strict rule of thumb.

If the mineral interest has no mineral attributes but pays royalties, it's an NPRI. If the mineral interest has the executive rights removed but pays a royalty and grants another attribute, it's a NEMI.

Either way, it's important to think about what rights you want and which you want to give away. We know reading legal documents isn't the best way to spend an afternoon but always read a document yourself. Even if you're juggling numerous assets, it's always a good idea to know what you're signing.

NPRI vs NEMI: Know the Difference

Before entering into any conveyancing, it's important to know what you're looking at, be that an NPRI or a NEMI. Are you happy to receive or pay out royalties only, or are there some rights you wish to keep/get?

NEMIs are flexible but beware that the language may not have the legality you intend it to. That's why you should work with a professional land conveyancer to draw up any agreements.

And speaking of professionals, with every aspect of your business, you should only use the very best. That includes your project management, sales, and marketing software too. Register today to see how Halsell can help you.

See other articles

Oil & Gas
What Is Energy Transition and What to Expect By 2050
Oil & Gas
Highest Paying Jobs in West Texas Oil Patch