Oil and Gas Interests Ownership & Royalties
Ownership of oil and gas interest are a bit more complicated than other types of real property ownership, as there are different types, with different obligations to the owner of the interest. It's important to note that royalty payments are a percentage of the production value that the mineral owner receives from oil and gas production or other natural resources as stated in the lease agreement with the oil and gas company.
Four common types of interest ownership in a well
Royalty Interest (RI): A percentage of production value that the mineral owner receives from oil & gas production as stated in the lease agreement. The royalty is paid by the lessee (producer) to the lessor (property owner) once the well is producing. Generally, the royalty interest owner is not required to pay costs to drill or operate the well. However, depending on the lease terms there may be post-production charges applied to the royalty interest for the royalty owner’s share of getting the hydrocarbons from the wellhead to a buyer. These post-production charges are applied as deductions (negative values) in the royalty statement details and you can often see the aggregated amount of deductions at the bottom of the royalty statement.
Overriding Royalty Interest (ORRI): A royalty in excess of the royalty provided to the mineral owners in an oil and gas lease. These do not affect the mineral owners. An example could be a geologist or a landman given a 1% ORRI by the operator in exchange for subsurface analysis or title work. Sometimes even a small ORRI can payout substantially.
Working Interest (WI): A type of ownership where both costs and revenue are shared based on the percentage of ownership. Costs include drilling, prepping the well for production (completion), and ongoing operating expenses. Often the percentage of shared costs is higher than the percentage of shared revenue for WI owners. This is because of the need to pay royalty interests that don’t also bear the drilling and operating costs.
Non-Participating Royalty Interest (NPRI): This interest type is similar to a normal royalty interest in that these interest types do not bear costs to drill or operate a well. However, the interest owner does not have executive rights to make decisions such as leasing and they typically do not receive lease bonuses. NPRI’s are often created when a mineral owner wants maintain the ability to make decisions regarding their mineral rights and royalty interests while monetizing part of their royalties or leveraging a portion of the interest in negotiations.