This post touches upon a commonly misunderstood issue: That the word "royalty" is used to described many different kinds of mineral right, which are governed by separate legal regimes in many cases.
These distinctions become relevant when one has questions like "Does XYZ's royalties expire when a lease expires?" or "Are my royalties subject to prescription?" The answers to these questions and others depend on what kind of royalty is owned. In hopes of clearing up some confusion, below is a summary of the main types of royalty, minus the rare breeds.
The Three Major Types of Royalty are:
"Mineral Royalty"/"NPRI" - This type of right is a burden on the land, rather than being dependent upon a lease or other contract. The Louisiana Mineral Code calls this kind of interest a "Mineral Royalty" (as opposed to a Louisiana "Mineral Servitude"). The other 49 commonly refer to this kind of interest as a "Non-participating royalty interest" or NPRI. This kind of interest may only be created by the owner of the full mineral rights, who carves out a portion of his revenue rights in the property. In Louisiana, the Mineral Royalty will be extinguished by prescription of non-use if production in paying quantities is not achieved for a 10 year period (or a shorter period if the parties so agreed).
"Lessor's Royalty" - This type of royalty is a right to a portion of the proceeds due a mineral owner under the terms of his lease. A lessor's royalty may only be created by the Lessor (mineral owner) in favor of another. For example a simple conveyance might say "I agree to sell 50% of my rights in XYZ lease to Ray." If the lease expires, so do Ray's rights. There is NO PRESCRIPTION for this kind of royalty in Louisiana - it will continue to exist for as long as the underlying lease is in force. When the lease expires, the Lessor's royalty is extinguished. NOTE: Mere mention of a lease of the property, whether in general or by reference to a specific lease, does NOT necessarily make the royalty dependent on the lease.
"Overriding Royalty" - The mirror image of the Lessor's Royalty, "overrides" are created out of the Lesses's (oil company) right to revenues under a particular lease. There is NO PRESCRIPTION for this kind of royalty in Louisiana - it will continue to exist for as long as the underlying lease is in force. Overrides may only be created by the owner of the "Working Interest" in the property.
A Basic Example To Bring Them All Together:
Assume Mo owns the mineral rights to a tract of land, which gives him the right to pay 100% of the costs of a well in exchange for 100% of the revenue. Mo leases his minerals to Speculator for a 20% royalty. Mo then sells to Roy "half of my royalty under XYZ lease to Speculator." Speculator's working interest gives them the rights to pay 100% of the costs of the well in exchange for 80% of the revenue. Now assume Speculator sells their rights to that lease to Operator, and Speculator reserves for himself a 1% overriding royalty.
Operator now owns the rights to pay 100% percent of the costs of the lease in exchange for 79% of the revenue. (Working Interest)
Mo is now entitled to 10% of the revenue (1/2 of his 20%) from the lease with limited deductions for post-production costs. (Fee Mineral subject to lease)
Ray owns is now entitled to 10% of the revenue (1/2 of Mo's 20%) from the lease with limited deductions for post-production costs. (Lessor's royalty).
Speculator now owns 1% of the revenue from the lease, with no obligation to pay costs. (Overriding royalty).
This post is meant to be educational, and should not be taken as a substitute for legal advice from a qualified professional.
Add a Comment