Understanding Oil and Gas Royalties
The royalty payment is made to the Royalty owner without the Royalty owner bearing any production or operating costs incurred by the operator, nor does the operator’s profitability, or lack thereof, effect the Royalty Interest.
Preamble: oil and gas “Royalty Interests” (RI) and “OverRiding Royalty Interests” (ORRI) originate from the extraction of oil and gas deposits from subsurface land that has been “Leased” by the landowner -- which could be an individual, or privately-owned entity, a Trust, the US Federal Government, or a State Government (collectively, the “Landowner”) -- to operators for profit. Landowners enter into a Lease Agreement with the oil and gas operator to exploit the subsurface portion or minerals of the land (known as “Minerals Rights”), limited to the property footprint or property lot boundary, with minimal involvement on the surface land itself. Lease Agreements typically include easements to allow operators access to roads and to limited use of surface areas (i.e., for pumpjacks, tanks, etc.), and extend and remain active in perpetuity so long as the Minerals are being exploited by the operator(s).
Royalty Interests: oil and gas Royalty Interests is the retention of a percentage of ownership by the Landowner of oil and gas minerals extracted from the subject property leased to the operator for exploitation. The landowner then receives a royalty payment from its share of revenue from the oil and gas production sold by the operator on the leased land or property. The royalty payment is made to the Landowner without the Landowner bearing any production or operating costs incurred by the operator, nor does the operator’s profitability, or lack thereof, effect the Royalty Interest. Royalty payments to the Landowner are made directly to the Landowner by the purchaser of the oil and gas production pursuant to Division Orders recorded with the County or government entity having jurisdiction over the subject property. Further, Royalty Payments are paid to the Landowner before any portion of the revenue earned from the oil and gas production is paid to the operator. Finally, Mineral Rights leases (and the resultant Royalty Interests) are considered real property and can be bought and sold like surface property, with ownership title and property deeds transferred accordingly, and the owner of the surface property, after the initial Lease Agreement, has no influence over subsequent transactions of Mineral Rights of the same subject property.
Overriding Royalty Interests: Overriding Royalty Interests is a claim to a percentage of production revenue earned by the operator from oil and gas produced out of the Mineral Rights but is not ownership in the minerals themselves. Like Royalty Interests, Overriding Royalty Interests do not bear any production or operating costs incurred by the operator, nor are ORRIs effected by or subject to the operator’s profitability, or lack thereof. Overriding Royalty Interest payments to the ORRI owner are made directly to the ORRI owner by the purchaser of the oil and gas production pursuant to Division Orders recorded with the County or government entity having jurisdiction over the subject property. Similarly, Overriding Royalty Payments are paid to the ORRI owner before any portion of the revenue earned from the oil and gas production is paid to the operator. Additionally, Overriding Royalty Interests are also considered real property and can be bought and sold like surface property, with ownership title and deeds transferred accordingly, and Overriding Royalty Interests remain with the Mineral Rights of the property regardless of a change in operators. Any new operator of the property Mineral Rights inherits the ORRI granted by a previous operator.
