Understand Mineral Royalty and Overriding Royalty Interests!
May 15, 2017
There are often confusing definitions pertaining to the leasing of mineral rights. Some of the more confusing terms used are mineral interests, royalty interests, and overriding interests. Each of these is slightly different and relate to the payment of income generated through oil and gas production. To fully understand the process of obtaining interests and royalties from any oil and gas rights ownership, it is essential to differentiate between mineral, royalty, and overriding interests.
Mineral interests or mineral rights are similar to royalty interests as they involve the ownership of oil and gas in the ground. Owners of mineral interests can lease their rights to drilling companies and receive in return an agreed lease fee and a bonus that allows the lessee to explore and drill for oil and gas. Owners of mineral interests may or may not have a royalty interest in the resources that are produced from the involved land.
Royalty interests are a portion of the resource; it is the income generated from the owned oil and gas produced from a mineral interest. Royalty interests differ from mineral interests because the royalty owner does not have to be the mineral interest owner. Both parties do own a stake in any oil and gas that is produced. A mineral rights owner may be the royalty holder or a third party owner who has leased that right. In addition, royalties do not involve a lease or collection of bonus payments nor involve an investment in the exploration or production of available resources.
Overriding Royalty Interests
While mineral interests and royalty interests both indicate an ownership of the resources in the ground, overriding royalty interests do not. An overriding interest is an ownership in a portion of the revenue generated from the production from a mineral right. An overriding royalty interest is based solely on the working interest of the resources produced. It does not affect the lease or sale process.
Overriding royalties are typically paid to landmen, brokers, or anyone else who secures an interest in the minerals by participating in the drilling project. These interests pertain only to an individual parcel of land being explored and drilled and adheres to the current lease terms. Overriding royalty interests expire when the mineral lease expires and production is stopped. Mineral and royalty interest owners maintain their ownership after production has ceased.
When contracting the sale or lease of mineral rights and royalty interests, it is important that owners understand how each of these terms relate to the ability to collect income from resource production. Both mineral and royalty interests are based on actual ownership of oil and gas resources, while overriding royalties can be viewed similarly to a commission paid to certain parties who assist with the production efforts. All three of these interests allow parties to obtain income through the oil and gas production in a variety of different ways!
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