What is a Non-Participating Royalty Interest?

A Non-Participating Royalty Interest (NPRI) is an interest in oil and gas production which is created from the mineral estate. Like the plain “royalty interest” it is expense-free, bearing no operational costs of production. The term “non-participating” indicates that the interest owner does not share in the bonus, rentals from a lease, nor the right (or obligation) to make decisions regarding execution of those leases (ie no executive rights). The owner of a NPRI has fewer rights than does the 'regular' royalty owner, who participates in at least one, if not all, of the aforementioned activities.

Reasons for Assigning a Non-Participating Royalty Interest

Let’s consider a few examples regarding the creation of and subsequent assigning of a NPRI.

1. Non-participating royalty interests are often created and assigned when the surface interest in a tract of land changes ownership. The potential wealth generated by a mineral interest and the surface space that can be disturbed motivate past and present land owners to want to share in future development (oil and gas royalties). Most people don't like giving up control, their executive rights, so NPRI's become a tool in negotiations. A seller of the land might reserve the minerals and assign an NPRI to make sure the current owner benefits from oil & gas development as well. On the flip side, if the buyer is acquiring the minerals, he might assign an NPRI to the previous owner as additional compensation, often goodwill.
2. Let's look at how a NPRI can be used to create a lump sum of cash. Assume Christmas is at hand. XYZ oil company is going to drill. They, and mineral owner Joe, are certain they’ll strike oil or gas. Joe happens to needs extra cash to get his daughter Sally the prize pony she’s always wanted. Since prize ponies are expensive, and given that the well is not yet producing (therefore no royalty checks are being sent yet), he carves out (creates) a small percentage of his interest as an NPRI to go to his brother Jack in return for a lump sum payment of $10,000. When and if the well does produce, Joe will receive income from his remaining royalty percentage, while the NPRI he apportioned to his brother Jack, will begin producing income for him. Now Sally is happy with her new pony, Joe is not in debt, and Jack owns a non participating royalty interest in an oil well. It’s a win for everyone. Your circumstances of course may be a little different, but you can see how Joe created the NPRI as a means to raise cash.
3. Another situation where a NPRI can be useful is in the case of a contemplated inheritance. Assume Mr. Jones is a wealthy man later in his years. He has interests in numerous producing wells and is also blessed with multiple grandchildren. He creates an NPRI for each of the grandkids. His intent is to gift a steady stream of monthly income, but does not want the kids to worry about negotiating leases, or having to make decisions concerning his oil wells. Those grandchildren could, in turn, reserve some portion of their NPRI, and assign a portion to their kids (or whomever they choose) in the future. Whether titled in the name of a trust, an individual, or to any other legal entity, a NPRI can be used as an alternate option for what would otherwise pass through normal inheritance.

Oil & Gas Companies Use NPRIs Too

Let’s say that Ace Oil Company is planning to drill in an area that hasn’t been proven to produce oil and gas (aka wildcatting). They feel that the ace up their sleeve is Sam Sureshot, one of the best geologists in the industry. He informs Ace management that he has a very good feeling about a particular drill site. So sure of it in fact, that he negotiates a NPRI for himself on top of his regular salary. Ace agrees that if indeed the well does hit, he’ll get an interest in the well's production in the form of a NPRI. In like fashion, Ace could also appropriate NPRI’s to other employees and/or contractors that work for them as additional compensation, or as a perk for their performance. Taking this further, the big-hearted Ace company could also designate NPRI for investors as incentive for their continued support, or as an additional return on investment. Overriding Royalty Interests are common in this particular situation also, but NPRI's can be used as well.

It depends on the organization, but it is not uncommon for professionals like geologists, landmen, and other key personnel to receive this type of benefit. The use of NPRIs is a way to align key contributor's compensation with the success of a well.

A NPRI Adds Flexibility

As you can see, a non-participating royalty interest can be useful for multiple reasons and in various situations. Often, citizen mineral owners are unaware of this type of created interest, and many never encounter them. If you do in fact have use for establishing this type of interest, it can be used to accomplish individual or generalized goals. As shown above, you can use NPRI as a negotiation tool in a land transaction, a short-term means of creating cash or as an alternate to a traditional inheritance. As for me, I'll be happy to have my name attached to almost anything that has the phrase 'royalty interst' attached to it!

Check Local Laws

Remember, mineral laws vary from state to state. If you aren't confident in the agreement you are making, be sure to have a qualified party review your oil & gas leases and agreements. Don’t get caught off guard.

• Additional Reading
• Oil & Gas Lease Forms – Short article explaining the common misconception of "Standard" oil & gas leases
• Oil & Gas Royalty Taxes - Learn about common taxes paid in relation to royalties.
• Bank Sight Drafts in Oil & Gas Leasing - The article answers the questions - "Why are they used" and "What are common alternatives?"