Net Royalty Acres Anyone?

When you’re talking about a “royalty” interest you’re talking about something that’s created by a piece of paper called a lease. When you’re talking about a “mineral” interest you’re talking about something that’s created by nature under the land. When you’re talking about land you’re generally talking about acres. So, what are you talking about when you’re talking about “royalty acres” or “net royalty acres” or “mineral acres” or “net mineral acres”? I’ve heard all those terms used, and I’ve seen numbers associated with them, inconsistently. One of those numbers is the number “8” or, inversely, “1/8”. I have a problem with automatically using an “8” when talking about royalty acres or mineral acres, because it assumes a lease with a 1/8 royalty. Not all leases have a 1/8 royalty; it might be 3/16 or 5/32 or even 1/4.

What I learned (which I don’t claim was right) was that “royalty acres” was the product of multiplying the number of acres (of mineral interest) by the royalty specified in the lease. If you own 80 acres and the royalty is 1/8, you have 10 royalty acres; or if the royalty is 3/16, you have 15 royalty acres. But if you only own a 1/2 interest in the 80 acres of minerals you have 40 mineral acres, and you have either 5 net royalty acres or 7.5 net royalty acres depending on whether the royalty is 1/8 or 3/16. The landman, however, is calling it 5 net mineral acres. The landowner asks what that means and is told it’s 1/8 of 40 acres. But, the landowner responds, I thought you said the royalty is 3/16!

I recognize that a lot of people have been accustomed for a lot of years to think in terms of 1/8 when thinking about oil and gas leases and “mineral acres” or “net mineral acres”. When putting a value on a mineral interest, one could argue that royalty interest is irrelevant, as there may not even be a lease. On the other hand, if there is a lease and you’re thinking of selling your mineral interest, would you think it’s more valuable if it’s generating a 3/16 royalty than if it’s generating a 1/8 royalty? But, you might argue, if there’s a lease then you’re selling your royalty interest and, of course, you’d want more for a 1/8 royalty than a 3/16 royalty. And here, if you practice law, is where you roll your eyes around because you know about all the litigation that’s been spawned because of documents entitled “Royalty Deed” that were actually a mineral deed but messed up because they were thinking about that 1/8 and so the grantor conveyed “my entire 1/8” interest.

It’s getting worse each passing year because the “new” kids working in the division order departments of the crude buyers don’t have a clue about net mineral acres or net royalty acres and will tell a landowner who calls up with a question about their division order that the decimal number on it is their net revenue interest (NRI). So then they call the lawyer who drew up their dad’s will but has never seen an oil and gas lease and god only knows what they’ll be told.

I’d favor banning the use of “net mineral acres” and “net royalty acres”. When I see either of those terms in a lease that’s been presented to a landowner client, I have to call the landman or lessee’s lawyer to verify what he/she intends to mean by it. Then I’ll probably draw up something to add to it in order to avoid confusion in the future.

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