WHAT ARE OIL & GAS MINERAL, ROYALTY & OVERRIDING ROYALTY INTERESTS?

WHAT ARE OIL & GAS MINERAL, ROYALTY & OVERRIDING ROYALTY INTERESTS?

Oil and gas minerals, royalties, and overriding royalties are similar in that they all receive revenues from the production of oil and gas from a well, and they do not pay for the drilling or monthly operating expenses of the well. Often you will see the term “royalties” used interchangeably to mean either mineral interests, royalty interests, or overriding royalty interests.

What’s the Difference Between Minerals and Royalties?

However, there is a slight difference between minerals and royalties, and there is an even greater difference between overriding royalties and both minerals and royalties. 

• Mineral interests and royalty interests are similar in that both involve ownership of minerals under the ground. 
• They both receive a portion of the income from the production of oil and gas. 
• The main difference is that the owner of a mineral interest also has the right to execute leases and collect bonus payments, and the owner of royalty interests does not execute leases or collect bonus payments. 
• Both mineral and royalty owners receive income once the well is producing, but only the mineral owner receives the up-front bonus payment.

What are Royalty & Overriding Royalty Interests?

Unlike mineral and royalty interests, overriding royalty interests do not constitute ownership of minerals under the ground. 

Instead, overriding royalties constitute ownership of a portion of the revenues generated from oil and gas production, and the ownership expires when the lease has been abandoned. 

Overriding royalties are created from the working interest. The main difference is that the owner of an overriding royalty does not own the minerals under the ground, only proceeds from the production of minerals. Once the lease has expired and production has ceased, the overriding royalty interest expires. 

Conversely, the owners of minerals and royalties maintain their ownership after production ceases.

What is the difference between “overriding royalty interest” vs “royalty interest”?

“Overriding royalty interest” and “royalty interest” are two distinct types of interests within the oil and gas industry, each with its own set of rights and characteristics.

It is vital to understand the differences between the two when making decisions related to oil and gas investments or operations.

What is an Overriding Royalty Interest (ORRI)?

1. An ORRI is created from the working interest and represents a share of the revenues generated from oil and gas production.
2. The owner of an ORRI does not own the minerals beneath the ground; they only receive proceeds from the production of those minerals.
3. The ORRI does not involve any rights to execute leases or collect bonus payments.
4. The ORRI owner does not bear any operating costs or expenses related to the well.
5. The ORRI expires when the lease is abandoned, meaning the interest is tied to the life of the lease and ceases to exist once production stops.

What is a Royalty Interest (RI)?

1. A royalty interest involves ownership of the minerals beneath the ground and is associated with a lease agreement.
2. The owner of a royalty interest receives a portion of the income generated from oil and gas production.
3. Unlike an ORRI, a royalty-interest owner does not have the right to execute leases or collect bonus payments.
4. The RI owner does not bear any operating costs or expenses related to the well.
5. Royalty interests are not tied to the life of a lease and continue to exist even after production ceases, as long as the minerals are still owned by the royalty-interest owner.

The primary differences between an overriding royalty interest and a royalty interest lie in:

• The ownership of the minerals
•  The rights associated with each type of interest
• The duration of the interest. 

An ORRI is a temporary interest tied to the life of a lease and does not involve mineral ownership, whereas a royalty interest involves mineral ownership and continues to exist even after production ceases.