08 Dec Why We Can’t Have Nice Things: Non-Participating Royalty Interests vs. Non-Executive Mineral Interests
As a landman, it is usually immediately obvious whether a reserved interest is of the mineral or royalty variety. Inevitably though, just when your title is looking clean and you think you are in the clear without having to order much curative, you come across a document that reads a little oddly. You might second-guess yourself and start to think, “Is this a royalty or a mineral interest, because it kind of looks like both?” Yet, you can’t ask a colleague for help because what will everyone think once they find out that you don’t know EVERYTHING about oil and gas title law?!
The truth is, this topic has been (and will likely continue to be) the center of much litigation. As landowners continue to become more sophisticated, their deeds become more complex. And as complexity increases, the words and phrases used in a particular deed are less likely to have the legal effect that one of the parties desired. This creates conflict between the transacting parties, as well as confusion for landmen and title examiners. Whether a particular reservation creates a non-participating royalty interest (“NPRI”) or a non-executive mineral interest (“NEMI”) is one manifestation of the difficulty created by increasing sophistication and complexity.
On the surface, the differences between a mineral and royalty interest are well-settled. A mineral interest is comprised of five (5) severable rights: 1) the right to develop, 2) the right to lease (the executive right), 3) the right to receive bonus payments, 4) the right to receive delay rentals, and 5) the right to receive royalty payments.[i] In contrast, a royalty interest is merely the landowner’s share of production, free of the costs of production.[ii] Furthermore, an NPRI is “an interest in minerals which is non-possessory in that it does not entitle the owner to produce the minerals himself, or permit him to join in leases of the mineral estate to which the royalty is appurtenant, and does not entitle the owner to share in the bonus or delay rentals … It merely entitles the owner to a certain share of production under said lease free of expenses of exploration and production.”[iii] Stated simply, then, an NEMI is a mineral interest that does not include the right to lease.[iv]
Conceptually, the distinction is well-defined; however, in practice, determining whether a reservation created an NPRI or an NEMI can be difficult. Take for example, a deed that reserves an undivided 1/16 mineral interest, but later conveys the executive rights and rights to receive delay rentals as to the reserved interest. What interest did the grantor reserve? What if the deed also provided that as to said 1/16 interest, the executive rights, rights to receive delay rentals and bonuses were conveyed? Is the conveyance of these attributes significant? Practically, what does it mean for the operator who must correctly pay the parties their respective shares of production?
In each instance, the title examiner must determine whether the grantor reserved an NPRI or an NEMI – and the difference is significant. If a party owns a 1/16 NPRI, they own 1/16 of production. Conversely, if a party owns a 1/16 NEMI, then as to their royalty payment, they own 1/16 of the lease royalty. So, if the lease provides for a 1/4 royalty, the NEMI would be calculated as 1/16 of 1/4, which equals 1/64.
Determining whether an interest is an NPRI or NEMI is far from black and white; however, the Texas Supreme Court appears to favor a rule that a mineral interest stripped of all attributes except the right to receive royalty is an NPRI. For example, in Watkins, the deed purported to convey a 15/16 interest in the minerals, and went on to reserve “a 1/16 interest in and to all of the oil, gas and other minerals in and under and that may be produced from said land; but it is understood that the grantor… shall not receive any part of the money rental paid on any future lease; and the grantee… shall have authority to lease said land and receive the cash bonus and rental; and the grantor…shall receive the royalty retained herein only from actual production…”[v] The Court held that the reservation was a royalty, noting that the grantor’s reservations referred to “the royalty retained herein,” while the grantees received all delay rentals, the executive rights, and all bonuses.
Similarly, in Temple-Inland, two deeds conveyed “15/16 mineral” interests and reserved a “1/16 royalty.”[vi] Both deeds provided that as to the “undivided one-sixteenth (1/16) part of, and interest, in the oil, gas and other minerals retained and reserved by Grantors in said land, it is understood and agreed that said one-sixteenth (1/16) interest is and shall always be a royalty interest…” Also, both deeds expressly conveyed all of the executive rights, bonus, and delay rentals. Again, the Court held that the Temple-Inland reservations were royalty interests.
In contrast, in cases interpreting a conveyance/reservation to be a mineral interest, the interest at issue included some other attribute of the mineral estate. For example, in Altman, the grantor excluded from the grant the executive rights and the right to receive delay rentals, but granted rights of ingress and egress for the purposes of exploration and production.[vii] Moreover, the conveyance omitted the word “royalty.” The Court held that the Altman deed conveyed a mineral interest stripped of two of its attributes – executive rights and the right to receive delay rentals.[viii]
Conveyances are increasingly unique, and require independent analysis. However, Texas Supreme Court jurisprudence suggests the following dichotomy: 1) if a reserved mineral interest is stripped of all of its mineral attributes except the right to receive royalty payments, the interest is likely an NPRI; and 2) if the reserved mineral interest is stripped of the executive rights, but vests the grantor with the right to receive royalty and at least one other mineral attribute, the interest is probably an NEMI.
Christopher Antus is a founding partner of Antus & Patton LLP and is licensed in Texas, New Mexico, and Arkansas. Christopher’s practice is dedicated to all facets of oil and gas title, operational, and transactional issues. He has rendered hundreds of title opinions covering everything from drilling and division order opinions to surface, mineral, and leasehold acquisition opinions. Christopher is proud to call Midland home, and appreciates the unique challenges that his clients face in the Permian Basin.
[i] Hysaw v. Dawkins, 483 S.W.3d 1, 9 (Tex. 2016); Altman v. Blake, 712 S.W.2d 117, 118 (Tex. 1986).
[ii] See Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118, 121-22 (Tex. 1996).
[iii] Arnold v. Ashbel Smith Land Co., 307 S.W.2d 818, 825 (Tex.Civ.App.—Houston 1957, writ ref’d n.r.e.).
[iv] See Altman, 712 S.W.2d 117.
[v] Watkins vs. Slaughter, 144 Tex. 179 (1945).
[vi] Temple-Inland Forest Prods. Corp. v. Henderson Family P’ship, 958 S.W.2d 183 (Tex. 1997).
[vii] See Altman, 712 S.W.2d 117.
[viii] It is important to note that a conveyance/reservation of executive rights also conveys/reserves the right to self-develop (i.e. rights of ingress and egress). Lesley v. Veterans Land Board of State, 352 S.W.3d 479, 492 (Tex. 2011).