KNOWLEDGE, NUANCE & EXPERIENCE
Fixed v Floating Non-Participating Royalty Interest (NPRI)
- Fixed royalty is the right to a particular share of the proceeds from production which is not proportionally reduced by the lease royalty.
- Floating royalty interest varies according to the lease royalty, and the mineral owner’s royalty is proportionately reduced depending on the floating royalty.
Issue: Blackacre “reserves 1/2 of the usual 1/8th royalty.”
The interpretation of the above reservation has traditionally been the multiplication of the one-half (1/2) reservation by the one-eighth (1/8) royalty yielding a fixed one-sixteenth (1/16 or .061250000) royalty. Several recent court rulings now considered this reservation to be a floating royalty which changes as the lease royalty changes. In other words, the one-half (1/2) reservation interest is multiplied by the current lease royalty. For example, if the current lease royalty is a one-fifth (1/5), then the one-half (1/2) reservation is now multiplied by the current one-fifth (1/5) lease royalty yielding a one-tenth (1/10 or .10000000) floating royalty. In another instance, should the current lease royalty be a one-quarter (1/4) then the one-half (1/2) reservation interest is multiplied by the one-quarter (1/4) lease royalty yielding a one-eighth (1/8 or .12500000) floating royalty. The NPRI owner stands to gain a significant amount of revenue interest. On the other hand, the mineral owner stands to lose revenue.
Various Texas courts have held the modifiers “usual 1/8th royalty” or “the usual 1/8th royalty” and “the 1/8th royalties paid to the landowner” as a floating royalty. Several court cases relating to this matter are below.
Wynne/Jackson Dev. L.P. v. PAC Capital Holdings, Ltd., 2013 Tex. App. LEXIS 6865, at *11-15(Tex. App. – Corpus Christi 2013, per denied). Traditionally the above NPRI reservation would be interpreted using the plain language of the reservation by multiplying the fractions together yielding a fixed 1/16 royalty interest. In this decision, the granting clause was superior to any conflicting language, in the other parts of the document. Many decisions throughout the years have followed this approach.
The Four Corners Rule
Luckel v. White, 819 S.W. 2d 459, 461 (Tex.1991) “The primary duty of a court when construing such a deed is to ascertain the intent of the parties from all of the language in the deed by a fundamental rule of construction known as the ‘four corners.”
The Estate Misconception Theory
Sundance Minerals, L.P. v. Moore, 354 S.W. 3d 507, 512 (Tex. App. – Fort Worth 2011, pet denied)
The court determined that a one-half (1/2) floating royalty was reserved when the grantor reserved “one-half (1/2) of the usual one-eighth royalty (1/8).” The court explained that the one-eighth (1/8) royalty was an example showing the type of interest intended to be reserved, and was not a limitation. The focus was on the “usual 1/8 royalty.”
The Estate Misconception Theory Stretched
Graham v. Proschaska, 429 S.W. 3d 650, 657 (Tex. App. – San Antonio 2013, pet denied)
The reservation was “one-half (1/2) of the one-eighth (1/8) royalty to be provided in any and all leases for oil, gas and other minerals now upon or hereafter given.” The court looked to the word ”the” as the modifier of the one-eighth (1/8) wrongly assuming that lease royalty would always be a one-eighth (1/8).
Medina Interest, Ltd. V. Trial, 2015 Tex. App. LEXIS 6382 at *15(Tex. App. – San Antonio 2015, pet denied)
The court interpreted the reservation “our undivided interest in and to the 1/8 royalties paid the landowner” to reserve a floating royalty interest.
Hysaw v. Dawkins, 2016 Tex. Lexis 100 (Tex. Jan. 29, 2016)
The mother devised to each child a NPRI of “an undivided one-third (1/3) of an undivided one-eighth (1/8) of oil, gas or other minerals”. She also provided that each child shall receive one-third (1/3) of the one-eighth (1/8) royalty.” The court ruled that “they cannot embrace a mechanical approach requiring the rote multiplication of double fractions whenever they exist.” The court concluded that the mothers intent was for all of her children to share in future royalties equally, bequeathing to each child a floating a one-third (1/3) royalty not limited by the one-eighth (1/8).
Thanks to the Kiefaber & Oliva LLP law firm for their Oil & Gas Royalty Issues presentation for simplifying the court cases and their interpretation.
Mineral or royalty reservation?
Issue: Whiteacre reserves “one-half interest in and to all of the oil, gas, and other minerals that may be produced from the land” …
Many in American Association of Petroleum Landmen (AAPL) think this is a royalty reservation. It may be; however, this reservation has not been court tested.
Three things to consider:
- Reservations of large fractions 1/2 generally are interpreted to be minerals.
- Many oil & gas attorneys interpret this to be a mineral reservation.
- What if it is a mineral reservation? Better not let 1/2 of the minerals stay unleased. Better consult with your client and make a collaborative
A mistake is waiting at every step
Issue: Did the exploration company provide a plat with the correct lease block outlined? Did the surveyor stake the well on the proper tract? Were all the lease title interpretations correct? Was all probate found? Has a new mineral owner called looking for a lease? Was an onerous clause allowed into the lease? Did the run-sheet pick up all the germane instruments? Did superfluous run-sheet instruments cause the attorney make an incorrect interpretation? Is an old unit holding the drill site by the production of a well three miles away? Did you drill a well and miss the NPR interest under the drill sites? What are you going to do? All of the flaws mentioned can be corrected. Of course, it is better not to make them in the first place.