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What is a non-participating royalty interest?

On Behalf of | Nov 19, 2023 | Oil & Gas Law

Understanding who has the right to what is crucial in oil or gas investments. The legal nuance of mineral rights can be incredibly complex, and with large amounts of money often at stake, disputes can soon turn nasty.

One term you need to understand is a non-participating royalty interest (NPRI). If you have access to one, an NPRI gives you the right to royalties without the right to bonuses or rentals from a lease. Perhaps more importantly, it does not give you any right whatsoever to be involved in decision-making concerning how those leases are executed.

While this can be great in some ways – your money goes to work, and you can just sit back and reap the rewards – you might not be so happy if royalties are low or non-existent. You may feel frustrated about decisions relating to the operation of the lease that affect your income.

Landowners and mineral rights owners can create NPRIs for various reasons

An NPRI might be created to incentivize someone like a geologist to help them seek further profitable options. They might be created to provide a steady stream of future income for family members as a form of inheritance without requiring them to get involved in the industry. Or they might be sold when an owner needs an influx of cash and does not want to take out a loan. They get the money they need, and the person who buys the NPRI gets the chance to benefit from what hopefully turns out to be a profitable venture.

If you have an NPRI, are considering creating one or accepting one, it is crucial to ensure you understand exactly what is involved. Poor wording in the agreement can lead to confusion that could cause problems for all involved.