What Are Overriding Royalties Interests?

An ORRI is an undivided interest in a mineral lease that gives you the right to a proportional share of the gas and oil that is produced. The overriding royalty interest is carved from the lease or working interest. Learn more about this below, and give Nix Patterson a call if you have questions about your interest structure.

Overriding Royalty Interest Overview

When property owners separate surface rights from subsurface rights, two mineral estates are produced: working interest (WI) and royalty interest (RI). Oil and gas companies frequently lease subsurface rights from the property owner with a working interest lease that allows the company to explore, drill, and produce oil and gas. In return, the property owner receives a royalty interest.

Typically, the oil and gas company will grant an ORRI to fund oil and gas operations to investors, landmen, geologists, and attorneys to compensate them. However, unlike royalty and working interests, an overriding royalty interest cannot be fractionalized unlike royalty and working interests. The ORRI is a non-possessory, undivided right to a share of the oil and gas production, but it excludes the production costs of the mineral lease.

Also, an ORRI is related to a royalty interest because it is part of the proceeds from the production sale. But an ORRI isn’t retained according to the oil and gas lease terms. Instead, an overriding royalty interest is assigned, granted, and created in the terms of another document. The most common documents that create an overriding royalty interest are Assignment of an Overriding Royalty Interest and Assignment of Oil and Gas Lease. The ORRI is not carved out of the regular royalty interest but rather out of the oil and gas company’s working interest, further reducing the oil and gas company’s share of the proceeds they will receive when they sell the minerals.

Differences Between ORRI and RI

A land owner with an ORRI has executory rights over the property’s mineral rights. This means they can divide mineral rights and write leases with other parties. When they do so, they get a signing bonus, payments on the lease, and royalty payments on oil and gas produced based on the proportion of their ownership of the mineral rights. This is in exchange for the leasing of the ownership rights. Also, the royalty mineral owner keeps ownership of the interest after oil and gas production ceases.

An ORRI holder does not have ownership rights to the minerals under the property, Instead, they have a non-possessory undivided interest. They own an interest in the lease rights (or working interest) of the exploration and production company. Granting ORRIs is a way for the oil and gas company to raise money to fund their operations. An ORRI allows the holder to receive royalty payments when the oil and gas generated are sold. After the lease is over, the interest goes back to the mineral estate.

What Determines the Value of an Overriding Royalty Interest?

Several things determine what the ORRI value is, including:

  • Mineral interest location. One in a shale basin with high production is worth more.
  • Producing oil and gas wells. Wells currently producing are valued more. How long the well can produce is also essential.
  • Production reserves and levels. Oil and gas wells featuring high producible reserves offer higher revenues when the oil and gas are sold. Producible reserves are rising as technology gets better.
  • Prices. Oil and gas price declines cause revenues to decline, so continued operations may not be profitable.

How Is Overriding Royalty Interest Calculated?

ORRIs are carved from the working interest in the oil and gas lease and not according to acreage, so determining the calculation is simple. The ORRI is just a straight percentage and can negotiated.

For instance, a 2% override would show on the royalty statement as a .02% interest in the revenues from selling leased oil and gas. But the details of the ORRI hinge on the language in the contract. The override could be interpreted literally or contain proportionate reduction language. This is why it is always wise to have an oil and gas attorney review your oil and gas lease.

Contact Our Nix Patteson Oil and Gas Lawyers

If you or your company have questions about ORRIs, RIs, and related matters, Nix Patterson can assist. Please contact our oil and gas attorneys today for a complimentary consultation about your overriding royalty interest or royal interest legal issues.

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