Understanding Oil and Gas Working Owners Versus Royalty Owners!
August 15, 2016
When a landowner owns the rights to the minerals contained within their property, they may be interested in selling these gas and oil royalties to another party or permitting drilling while retaining such royalties. In either case, it is important for mineral rights owners to understand there are two types of ownerships that apply when land is actively being drilled: working owners and royalty owners.
These two types of ownership apply to the same mineral rights regardless of whether the rights are being leased by a third party or developed by the mineral owners themselves. Working owners and royalty owners have different stakes in oil and gas royalties; therefore, they collect different royalties from drilling projects.
What Are Working Ownerships?
Working ownerships, also called working interests, are investment ownerships in mineral rights by the owners or lessees who are doing the actual land drilling to extract minerals. Working owners cover the cost of drilling for minerals, including all operating expenses and associated costs. They are also responsible for all liabilities during the drilling and production process. Working mineral rights owners also pay royalties to the mineral title owner if the drilling is successful and oil or gas is produced. If no minerals are produced, working owners are still responsible for the cost of the operation, including the additional cost of capping the well before abandoning a project.
What Are Royalty Ownerships?
Royalty ownerships, also called royalty interests, are ownerships of mineral royalties that result in the payment of royalties without an investment in drilling for them. Royalty owners, whether they are owners or lessees of mineral rights, collect royalties from working owners when drilling is successful and oil and gas are produced. Royalty owners essentially have no risk, as they make no investment in the actual drilling process; they collect royalties when minerals are produced from a mineral right. Royalty owners essentially have little to lose and everything to gain in oil and gas royalties, since it is the working owners investing all the money and work involved in the production process.
How Working and Royalty Ownerships Apply to Mineral Rights
Mineral rights ownership can be confusing, especially when owners are interested in selling gas and oil royalties.Therefore, it is important for owners to understand the different types of ownership, so they know what to expect when leasing their mineral rights in the hopes of generating revenue. Documented mineral rights owners can either partner with a working owner to drill for minerals, or lease their rights to a third party who will then work with their own working owner to drill for minerals.
In the first situation, the mineral owner is also the royalty owner. In the second scenario, the third party is the royalty owner through the mineral lease; but the working owner remains the same. In all cases, working owners are those who actually invest in the production process, while royalty owners collect a portion of the revenue. If mineral owners have leased to a third party, they collect revenue based on the lease agreement.
The importance in understanding working ownerships and royalty ownerships lies in knowing which parties undertake the most risk in a mineral drilling project and how royalties are paid to the various investors. Oil and gas royalties are paid to royalty owners and working owners according to their specific contracts. Mineral owners receive a lease bonus. When the mineral owner is also the royalty owner, that party can benefit even more. Regardless of any lease agreements and financial arrangements, mineral rights owners must understand the different types of ownerships before leasing their rights or selling gas and oil royalties!
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