The Non-Participating Royalty Interest Owner has been known to make things interesting for operators when the former has not fully been taken into account.
Operators of oil and gas lands can potentially tread some dangerous water when it comes to the payment of royalties to all interest owners. Typically, operators have Drilling Title Opinions drafted for lands they are planning to operate on, and move forward based upon the interests listed as owned in such Title Opinions. However, not all interests are necessarily included in such Title Opinions. In order to ensure that all interests are covered, Operators usually have a Division Order Title Opinion drafted before they put a well in pay. These types of Opinions will list all owners entitled to receive payment on production, including Non-Participating Royalty Interest Owners (NPRIs).
NPRIs are often confusing for both owners and operators alike. An NPRI is entitled to a cost free share of production, like regular royalty interest owners, but are not entitled to a share of any bonus or rentals, nor may they execute leases (although they must ratify the pooling provisions in leases). Without a Division Order Title Opinion, these interests may not be apparent, and could be overlooked.
Texas offers protection for operators when they send out division orders that are to be signed by the interest owners. The Texas Natural Resource Code provides that division orders are binding for the time and to the extent that they have been acted on and made the basis of settlements and payments. Also, division orders are terminable by either party on 30 days written notice. Therefore, assuming the execution of the division order, an Operator should be shielded from liability for any amounts it underpaid until the division order is revoked. However, this is not true if the Operator benefitted from the underpayment of royalties.
For example, in a suit filed by an NPRI owner, the Court agreed with the Operator when denying the owners underpaid royalty payments. (Gravenda vs. Strata Energy, Inc.). The owners had executed division orders, and later realized there was a mistake on them. The owners revoked the division orders, and requested the Court award them the underpaid royalties from the years in which the division order was in effect. The Texas Supreme Court upheld the decision, holding that division orders were binding until revoked. This was also due to the fact that the Operator has a right to rely upon the assertion by the owner (in signing the division order) that the interest was detailed correctly. (In other words, the Operator relied, and reasonable reliance would ultimately be to his detriment if decided any other way).
Detrimental reliance explains why purchasers and operators are usually protected by the rule that division orders are binding until revoked. In the typical case, purchasers and operators following division orders pay out the correct total of proceeds owed, but err in the distribution, overpaying some royalty owners and underpaying others. If underpaid royalty owners’ suits against purchasers and operators were not stopped, purchasers and operators would pay the amount of the overpayment twice—once to the overpaid royalty owner under the division order and again to the underpaid royalty owner through his suit. They would have double liability for the amount of the overpayment. Exposing purchasers and operators to double liability is unfair, because they have relied upon the division order’s representations and have not personally benefited from the errors. However, the Texas Supreme Court does note that when the operator “prepared erroneous orders and retained the benefits, […] the division orders were not binding.”
Recently, BP America and Cimarex Energy (collectively “BP”) have been sued by a group of NPRI owners, who allege that BP has not paid them amounts due to them out of production. At this time, I do not know if perhaps the owners are mistaken as to their ownership, if BP did not have a Division Order Title Opinion drafted and overlooked this interest, or if the owners executed division orders and later realized a mistake. BP counters that the owners are not entitled to any payments, and all royalty payments were correctly paid. This is an understandable position considering that the owners are claiming to have an interest in 1/16 of production, and BP has realized over $100 Million on the production of oil from the tracts in question. In addition, the owners have alleged breach of contract, which, if they are successful, entitles them to recover attorneys’ fees in addition to any damages. BP, meanwhile, appears to have retained the benefit, and if they are found to have done so wrongly, could be exposed to more claims.
The moral of this story? Protect yourselves, Operators. The Texas Natural Resource Code tries, and attorneys help fill the gap. But if you go forward willy nilly, you could miss some of those pesky NPRIs, and, having none of the protections available to you, may end up in more hot water than you want to deal with.