Bundle of Sticks: Understanding Mineral Ownership Rights
When most of us think about owning a piece of property, we typically only think about the object itself – the shiny new car, the beautiful mansion, the expensive diamond bracelet – instead of the rights that exist between that piece of property and its owner. In real property law, these rights are often described as a “bundle of sticks.” Each “stick” in the bundle represents a different right belonging to the property owner.
This metaphor is particularly helpful in oil and gas law due to the nature of mineral rights and the ability of a property owner to break off each “stick” from the bundle and the ability to break off a portion, or “twig,” from that particular “stick,” thereby creating a new interest. The possible variations as to the number of owners, types of interest, and amounts owned are potentially infinite, which makes the incidents of oil and gas ownership unique and often causes heated disputes and long, expensive legal battles when people are mistaken as to what exactly they own.
The Five “Sticks”:
A fundamental of real property law is the ability to sever a tract of land both vertically and horizontally. We encounter vertical severances every day when we pass by a subdivision or look at a map – the interest in a larger piece of property has been vertically divided and split up amongst different owners. Likewise, a horizontal severance “severs,” or divides, ownership of the surface and the underlying minerals; in other words, one person or a group of people could own the surface of a particular tract of land, while another person or group could own the minerals under that same tract of land. For example, imagine that A owns both the surface and minerals of Blackacre, then A conveys only the surface of Blackacre to B, reserving all of the minerals underneath, thereby horizontally severing the surface and minerals belonging to Blackacre.
In the above example, although the mineral estate has been severed from the surface, mineral ownership remains undivided; in other words, by reserving 100% of the minerals under Blackacre, A owns the entire bundle, or all five “sticks,” which are:
(1) the Right to Self-Development
(2) the Executive Right
(3) the Right to Receive Bonus Payments
(4) the Right to Receive Delay Rentals
(5) the Right to Receive Royalty Payments
The Right to Self-Development:
The right to self-development is defined as the right to develop the mineral estate by drilling or mining for oil, gas, and other minerals, along with the obligation to bear the costs of such development. An example of an associated “twig” that can be broken off from this “stick” is the mineral owner’s right of ingress and egress, being their right to enter into and use as much of the surface estate that is reasonably necessary to develop the minerals. Typically, an oil and gas lease conveys this “twig” to an oil company, or Lessee, for a specific period of time and under specific conditions. It may seem counterintuitive that a right inherent to the mineral estate is the right to access and use the surface; but, in Texas, the mineral estate is the dominant estate and would be of little to no value without the right to access and produce the underlying minerals. Some savvy property owners reserve this “twig” to themselves when signing oil and gas leases requiring instead that oil companies access their minerals from adjoining tracts of land and thereby preserving the value of the surface estate.
The Executive Right:
The executive right is the right to authorize exploration and development of the mineral estate, or in layman’s terms—it is the right to lease. Similar to the other “sticks” in the bundle, it can be owned differently from the rest of the mineral estate, which is why it is important to ensure that an oil and gas lease is executed by the executive right owner.
Once this “stick” has been broken off from the bundle, other owners are considered “non-executive interest owners,” meaning that they still own some type of interest in the minerals, but do not have the power to execute a lease covering those minerals. Additionally, Texas courts have made it clear that the executive right owner does not have a duty to enter into a lease on behalf of non-executive interest owners. In other words, the executive owner can refuse to lease the minerals for no reason at all, and the non-executive owner can’t do anything about it. Instead, the non-executive owner is stuck between a rock and a hard place: owning property that could likely generate a profit for them but being unable to utilize it.
The Right to Receive Bonus Payments & The Right to Receive Delay Rentals :
The right to receive bonus payments is just that - a bonus payment is the compensation given to entice the mineral owner to enter into an oil and gas lease. Finally, the right to receive delay rentals entitles the owner to any payment made to maintain the lease when development has been deferred.
Although an owner can break either of these “sticks” off from the bundle, more often than not, these two “sticks” automatically travel with certain types of interest. For example, the type of non-executive interest a person owns determines if these two “sticks” are included by default as part of that owners’ rights or not. For instance, a mineral interest stripped of the executive right is a non-executive mineral interest owner, or “NEMI.” The owner of an NEMI, absent other provisions in the vesting instrument, also has an interest in the right to receive royalties, the right to receive bonus payments, and the right to receive delay rentals by default. Conversely, a person who owns a “bare” royalty interest (only an interest in the right to receive royalties) “stick” stripped of the executive right is a non-participating royalty interest or “NPRI” and unlike the NEMI owner, an NPRI owner is not entitled to either bonus or delay rentals.
The Right to Receive Royalty Payments:
The final stick is the right to receive royalty payments. This is the right to receive a portion of production, typically a fixed fraction or a percentage agreed upon in advance, free from production costs. This “stick” in particular showcases the many ways that an owner can break “twigs” off thereby, creating new interests. For example, an overriding royalty interest, or “ORRI,” is a royalty “carved out” of a Lessee’s working interest. An NPRI is a royalty granted by the property owner, or lessor, and deducted from their interest in the lease. Further, the type of “twig” broken off may hinge on how the royalty payment is calculated. For example, an NPRI can be either “fixed” or “floating”, depending on the language used in the instrument that created it, and there is a long line of Texas cases dealing with disputes over this distinction.
Ultimately, this brief overview only begins to scratch the surface of the infinite and complex ways the five “sticks” of mineral ownership can be broken off from the bundle in whole or as “twigs.” We hope this small glimpse demonstrates to you just how important it is to obtain an expert opinion if you think you may own a mineral interest or are seeking to acquire one.
This blog is made available by Mazurek, Belden & Burke, P.C., for educational purposes only, and not to provide specific legal advice. This blog does not create an attorney-client relationship between you and Mazurek, Belden & Burke, P.C. This blog should not be used or considered as a substitute for competent legal advice from a licensed attorney in your state. If you have any questions about this topic, please contact us.