Net Royalty Acres Anyone?

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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.

End of an Era

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A long-time (over 30 years) client and friend opined recently that the oil industry in Eastern Kansas, possibly Western Kansas, as well, is on its death bed. He sees no hope of recovery. A few hardy souls might eke out a modest living, but the industry will never see the kind of activity that drove it in the past. Even if the price of oil can recover, the industry cannot. I had arrived at the same opinion myself, and several clients have been wondering how to get out without having to accept a fire sale price for everything they worked so hard to build up all these years. I expect they’ve missed the boat.

I intend to continue this article. I don’t have the complete article in my head yet, though. Since I don’t post very many articles, I decided the best way to motivate me to write this one would be to go ahead and publish the start of it. Don’t want to appear to be somebody who can’t finish things, right?

Mineral Rights and Leases – Confusion

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Many landowners are confused about mineral rights and how oil & gas leases work. Many oil & gas lease operators are also confused about mineral rights and even about some of the clauses in their oil & gas leases. There’s also confusion among lawyers and judges, especially those who aren’t experienced with mineral rights and oil & gas law. I shuddered one day in court when the judge held up the oil & gas lease and said, “Looks like just another business contract to me.” My opposing counsel also shuddered, and we looked at each other, knowing we would settle the case because there was no predicting what this judge might do with it. Minerals and leases thereon have spawned volumes of court cases spanning more than a century of jurisprudence. It’s a subject well suited to the word “esoteric“. Lawyers and judges like “black letter law” because it requires no interpretation, nor analysis of how it might apply to a given factual situation. The phrase rarely, if ever, applies to oil & gas cases. Yes, there are statutes and regulations on the books printed in black letters. They are frequently poorly drafted or subject to interpretation or, more often, just not clearly dispositive given the facts that can arise in the real world. It’s amazing what people who are confused about mineral rights and leases can spawn. Okay, where am I going with this?

It’s not unusual to get a phone call from a landowner who starts with, “I just have a quick question…” There will be a five or ten minute description of their perspective of the matter before getting to the quick question. I invariably start my reply with, “Well, there’s no quick answer.” Then I explain that the law is generally not black and white when it comes to oil & gas matters and I can’t provide a competent answer within the confines of a phone call. Sometimes I provide an educated guess but it is accompanied with warnings and disclaimers. Then I disclose my hourly rate and advise it’s likely to involve at least three hours of billable time to study the pertinent documents that they probably don’t have in their possession but will need to get for me (or else pay me to track them down with a title search), to track down some pertinent information that I can probably find online, and to then explain where they stand, which won’t be a sure win or sure loss but, hopefully, somewhere east or west of 50/50. By now I’ve been on the phone at least half an hour that I can’t bill for. Okay, where am I going with this?

Sometimes I suggest they do some “homework” to acquire basic knowledge about mineral interests and oil & gas leases. This can shorten the amount of time it takes for me to explain what the law portends for their situation. As a simple example, if they know what “royalty” means, then I can use it in a sentence without having to spend extra time explaining it; and, if they know the difference between a “mineral deed” and a “division order”, then that will save time. Saving time will save them money, since the less time I have to spend on it the less my fee will be. So, to that end, I sometimes refer them to one of my blog posts that has links to information about minerals and leases.

Which brings me to where I was going with this, which is another article I recently came across: “Mineral Rights” on the Geology.com website. It’s a pretty good summary of mineral rights in layman’s terms.