In the U.S., landowners have full enjoyment of their property, including what’s above and below the surface. They have the option of splitting their estate, which severs the rights to the minerals below ground from the ownership rights of what’s on the surface. David Goodnight explains the different types of mineral interests determine how much sway an owner has over the land and how much they are entitled to receive from the extraction or sale of their minerals.
Someone who has the mineral interest in a property has the full executive rights to the minerals found on, in, or beneath the land. They can explore the minerals, develop them, and arrange for mineral production. They can receive royalties, rental payments, and lease bonuses for the minerals found on the property. A company or individual can acquire a property’s mineral interest from a fee simple owner, thereby severing the minerals from the surface. In this instance, the original owner can retain full control of the surface while a completely separate individual or company owns and manages the mineral rights. In separating the minerals from the surface, the mineral ownership takes on a life of its own with its own chain of title through the years. An entity or individual can also own just a portion of the mineral interest. When an owner possesses less than 100% of the mineral interest, they own a fractional mineral interest. Someone with a mineral interest in a property has the right to use the surface as needed to extract, develop or explore the minerals beneath. David Goodnight explains this is why minerals are commonly referred to as the “dominant estate.”
David Goodnight advises A mineral interest owner can enter into a lease with a company that wants to drill wells on the land for mineral extraction. The lease gives the oil or gas company a working interest in the property. With a working interest, the company has the right to develop, produce or explore minerals found beneath the surface (and pay for it all). The entity that holds the working interest takes care of the expenses associated with drilling and extraction.
After signing a lease with an oil or gas company, a royalty interest will be calculated in any wells that are drilled and produced using the royalty percentage set forth in the lease. This royalty interest gives the owner a portion of the drilling or extraction revenue without paying for the extraction process themselves. The royalty interest exists for as long as the company that leases the land continues to drill. Once the drilling stops, the interest is gone. At that point, the mineral interest holder can lease working interest to a different company. Mineral rights owners might decide to sell royalty interest to a separate party, retaining the executive rights and mineral interest. Two examples of royalty interest that mineral rights owners may take advantage of include non-participating royalty interest and overriding royalty interest. When someone has a royalty interest in oil or gas, they own a part of a resource or have a right to some of the revenue the resource produces. The owner of a royalty interest doesn’t have any responsibility for the cost of operating wells or drilling for gas or oil. David Goodnight explains the three types of oil and gas royalty interests:
1. Ownership Interest
An ownership interest might be the most common type of royalty interest. Someone with an ownership interest owns the property, as well as the rights to what’s beneath the surface of the land. A company that wishes to drill into the land to extract any oil or gas found beneath it has to take a lease from the mineral owner before they can begin operations. Usually, the company offers to give the owner a royalty payment. The payment might include a sign-on bonus along with the royalty interest payment. The lease rate the owner receives depends largely on (i) the competition for leases, (ii) perceived risk (i.e. an unproven area will fetch lower royalty in exchange for the risk taken on by the operator), (iii) oil price, and (iv) long-term well economics.
2. Non-Participating Royalty Interest
Like an ownership interest, a non-participating royalty interest (NPRI) is a non-cost bearing interest in oil and gas production. If a landowner wants to sell their property but maintain a stake in the payments for the oil or gas beneath the surface, they might reserve an NPRI, allowing them to keep a stake in the profits. Similar to when minerals are severed from the surface, NPRIs are essentially royalties severed off the minerals. Non-participating royalty interests are called so because unlike the mineral owner, they do not get to participate in lease signing bonuses, rental payments, or the lease negotiations themselves; they just enjoy the production proceeds that are derived therefrom. When production begins on the land, the person or company who bought the NPRI will begin receiving payment from the operator based on the percentage defined in the royalty deed.
3. Overriding Royalty Interest (ORRI)
ORRIs are additional burdens created on a lease by a Lessor, usually at the time when they sell a lease to another oil company. For example, if a landman took an 18.75% lease from you, they can sell it to another oil company while reserving a 1.25% ORRI.