Fixed or Floating Non-Participating Royalty: The World May Never Know - Part I

In Texas, the "mineral estate" is a bundle of different rights that can be conveyed or reserved with or without the other rights in the bundle, such as the right to lease the minerals (termed the executive right) and rights to things like lease bonuses, rentals, and royalties. When the right to royalties gets plucked out of the bundle, the party receiving or retaining such an interest is said to own a "non-participating royalty" (or “NPRI”). For about as long as oil and gas have been pulled out of the ground in Texas, landowners have demonstrated a love for creating NPRIs.

Don’t Panic!

In theory, this arrangement should be simple enough: the NPRI owner comes along for the ride and gets paid their piece of the royalty if and when the minerals are produced (usually under an oil and gas lease). After all, they're non-participating, right? In practice, however, establishing this arrangement has proven to be anything but simple for three primary reasons: (1) non-participating royalties are created by language included in a deed, so there are countless ways in which the interest can be (clumsily) described; (2) properly describing non-participating royalty interests requires an understanding of the legal concepts underpinning leasing and producing oil and gas, so the widespread misunderstanding of those legal concepts in the past resulted in seemingly contradictory and ambiguous descriptions of non-participating royalty interests; and (3) there's commonly a lot of money at stake with non-participating interests, so the parties involved have every incentive to fight over their interpretation. The tl;dr here is that many deeds may as well have been drafted by monkeys hitting random keys on a keyboard (extra points if the monkey has a juris doctor). Monkeys also generally don’t read very well but do like to fight over shiny things. 

Definitely not reminiscent of the writer’s room for OG Energy Blog. There’s only one mindless ape here, and he uses a computer rather than a typewriter.

Describing the Non-Participating Royalty: Fixed versus Floating

The heart of this conflict is the fixed versus floating distinction. If the NPRI is "fixed" (sometimes called "fractional"), then it is calculated based on overall production of minerals—it's fixed and doesn't change. If it is "floating", then the NPRI is calculated based on the royalty provided for in an oil and gas lease—it floats up or down with the lease royalty. The distinction can mean big differences in the split of royalty checks sent to the NPRI owners and the burdened mineral owners. To illustrate this point, if a mineral interest burdened by a 1/5th NPRI is leased at a 25% royalty, a fixed NPRI would entitle the NPRI owner to 20% and the burdened mineral owner the remaining 5%, while a floating NPRI would entitle the the NPRI owner to 5% (25% lease royalty multiplied by 1/5) and the burdened mineral owner the remaining 20%.

So, what makes the NPRI fixed or floating?

Actually, I’d really like to know, so please share if you find out.

Let's take a look at some examples that are similar to language reviewed by Texas courts in the past.  Here's a few that were interpreted to be fixed NPRI:

• A one-fourth royalty in all oil, gas and other minerals in and under and hereafter produced

• A fee royalty of 1/32 of the oil and gas

• An undivided one-sixteenth royalty interest of any oil, gas or minerals that may hereafter be produced

• One-half of the one-eighth royalty interest

• An undivided 1/24 of all the oil, gas and other minerals produced, saved, and made available for market

• 1% royalty of all the oil and gas produced and saved

And here's a few examples where the reviewing court found a floating NPRI:

• 1/16 of all oil royalty

• The undivided 2/3 of all royalties

• One-half interest in all royalties received from any oil and gas leases

• An undivided one-half interest in and to all of the royalty

• One-half of one-eighth of the oil, gas and other mineral royalty that may be produced

• One-half of the usual one-eighth royalty

Clear as mud, right?  It gets better.  What if, in each instance above, a second fraction is included later in the deed that is worded as "the same being equal to [fraction] of the usual one-eighth royalty"?  What if the second fraction also has independent granting language?  What if the second fraction, when multiplied, does not match with the first (e.g., first fraction is "1/4", but the second is "1/4 of the usual 1/8")?

Breaking the Fourth Wall: The Four Corners Doctrine

If you're confused, you're not alone. There's a line of reported cases in Texas stretching back a century in which the courts have tried to untie the Gordian knot of interpreting non-participating royalties. Their methods have changed over time—sometimes markedly so—with the most recent overarching directive of the courts being the beloved four corners doctrine softened by a “holistic approach” that has seemingly opened the door to injecting outside information into the language of unambiguous deeds.

Great news for people like us who make a living off of words!

Let's back up a moment to discuss how the four corners analysis is supposed to work. In Texas, the objective of a court interpreting a deed is to effectuate the intent of the parties solely as expressed in the deed. In other words, the court's job is to determine what the words within the four corners of the document say. The court must look at the entire document and harmonize and give effect to all its parts. The “plain meaning” of the words used in the document controls, and no term should be disregarded. The purpose of these rules is to backstop the freedom of parties to contract and decide the terms of their agreements. The court is there to respect and enforce the terms of the contract (or in our context, a deed) in isolation. Outside information—called extrinsic evidence—may not be taken into consideration unless the court finds the deed ambiguous (which it will almost never do).

Shown: Texas courts bending over backwards to find a deed unambiguous.

Implicit in this directive is that the court make its interpretation based only on what the parties said in the deed, not by what the court thinks the parties may, or even likely, intended to but did not say.  Despite this limitation, it's clear that courts are now reading nonspecific, generalized past misunderstandings and expectations of mineral owners into deeds found to be unambiguous despite no explicit language in the deeds indicating any such intent.  This has made an already difficult interpretation issue even more difficult.  We're left with NPRIs being a kind of Schrödinger's cat—the NPRI is simultaneously fixed and floating unless and until either (a) a court interprets it as one or the other or (b) all NPRI owners and burdened mineral owners explicitly agree to its interpretation, neither of which are guaranteed to occur.

Any of you out there unfortunate enough to be tasked with getting a bunch of landowners to sign a stipulation know what it must be like to herd cats.

In Part II, we’ll dive into the two main “mistake doctrines” that courts are using to read additional information into the text included in a deed—the Estate Misconception Theory and the Legacy of the 1/8th Royalty.