Category Archives: Oil & Gas Industry

Mineral Interests: An Overview

What Are Mineral Interests?

Mineral interests, often referred to colloquially as “mineral rights”, are a significant and unique form of real estate interest in the United States. The United States is the only major country in the world where these interests are predominantly owned by private individuals and companies rather than by the government.

Mineral interests in a particular parcel of land grant the owner the entitlement to extract and profit from minerals found beneath the earth’s surface. These rights encompass a variety of natural resources such as coal, lithium, gold, and silver. However, in the United States, the most prolific and valuable natural resources are oil, natural gas, and related hydrocarbons used for energy.

Mineral rights can be sold, leased, or otherwise transferred separately from the surface of the land, which means that the person or entity that owns the surface rights to a piece of land might not also own the rights to the minerals beneath it. Therefore, there are two major ownership classifications for the mineral estate of a particular parcel of real estate:

Fee Simple Estate: Both surface and mineral rights are owned by the same party.

Severed Estate: Mineral rights have been legally separated from surface rights at some point, meaning the ownership is different for these two components of the parcel. The exact depth at which the severance occurred may vary, but a good rule-of-thumb is around 100 meters below the surface of the earth. In areas of the United States where ample oil & gas production is occurring, the vast majority of property parcels are severed.

Mineral Interest Monetization

Before any exploitation of natural resources occurs on mineral interests for a particular parcel, the mineral interests are said to be “non-producing”. It is initially unknown whether any valuable mineral deposits exist within a particular mineral estate, and unless some such deposit is located in the future, the mineral interest will stay in “non-producing” status perpetually. In this state, the mineral interest portion of the parcel is generally not subject to property taxes, as there is no proven or determinable value to any minerals which may or may not be present.

Typically, in the oil & gas industry, mineral interests begin the process of being monetized via the following sequence of events:

Step 1: Deposits are located. This occurs when an exploration & production (“E&P”) company, also referred to as an “operator” of wells, speculates that valuable oil, natural gas, or other hydrocarbon deposits may be present. These deposits are located by professionals (often, geologists or petroleum engineers) using various methods and technologies, but the presence or abundance of minerals present in a particular location are almost never known for sure until a well is drilled. E&P companies are referred to as “upstream” companies in the oil & gas industry because they are actively involved in the extraction of natural resources from the earth.

Step 2: Mineral interests are leased. After a sizable mineral deposit is located, the E&P company contacts the owner(s) of a mineral estate in order to lease the mineral interest. The owner(s) must sign a formal oil & gas lease (“OGL”) document which grants the E&P company the right to explore for and extract the hydrocarbons in return for an immediate lease bonus, a royalty percentage of the revenue from any extracted minerals (typically, between 12.5%-25%), and other compensation terms stipulated in the lease. If no wells are drilled within the term of the lease, which is typically between 3-5 years, the the mineral interests again become unleased.

Step 3: Well(s) are drilled. Once an operator has received the necessary permitting from regulatory authorities, they can commence the drilling of one or more wells for the extraction of oil, natural gas, or other hydrocarbons. The operator is responsible for 100% of the costs of drilling and therefore none of these costs are the responsibility of the mineral owner. Upon successful drilling of the well(s), the operator will sell the produced hydrocarbons to a “midstream” company which buys, transports, and refines them into various substances, such as gasoline and diesel fuel, which can be used for energy. These refined products are later sold to a “downstream” company, such as a chain of car refueling stations, which sells the refined products into the market. Sometimes, if the operator of the drilled wells is a very large oil & gas company, they will themselves have a midstream and/or downstream arm to their company and will therefore fill the role of “purchaser” of the hydrocarbons themselves. Whether or not this is the case, the produced commodities are sold at current spot prices as of the moment they are produced and taken away by the midstream company (or midstream division), less certain pre-agreed deductions and production-related taxes. Once a mineral interest reaches this “producing” state, it will now be appraised on an annual basis by governmental tax authorities for the assessment of an annual property tax on all mineral owners in the parcel.

Legal Framework Governing Mineral Interests

Ownership of mineral rights in the U.S. is influenced by both federal and state laws. The federal government, through laws such as the Mineral Leasing Act and the Mining Law of 1872, sets basic guidelines, while state laws provide further regulations which in some cases vary significantly. States like Texas, Oklahoma, and North Dakota, for example, have their own elaborate sets of rules which cater to their rich mineral deposits.

As with any real property, mineral rights can be conveyed through leasing, selling, or inheritance. Transactions must comply with both state and federal regulations, which are numerous, and certain title and administrative challenges arise during the transfer process.

Additional information about the complexities of mineral rights transfers, as well as how tokenization resolves many of these issues, is available in our blog post Why Tokenize Mineral Interests?

Conclusion

Mineral interests are a complex but integral part of the U.S. real estate landscape. Understanding the different types of mineral interests (see our blog post Types of Mineral & Royalty Interests), along with the regulatory and economic contexts in which they operate, is crucial for anyone involved in this field.

Types Of Mineral & Royalty Interests

Mineral & Royalty Interest Types

In the United States, mineral and royalty interests come in various types and represent ownership of, or profit-sharing rights in, the production of oil, gas, and other minerals from the subsurface portion of a particular parcel of land. Understanding these interests is crucial for investors and landowners alike. Here’s a breakdown of the most common types:

Mineral Interest (MI)

Full Ownership Rights: Full ownership of the minerals beneath a tract of land.
Full Executive Rights: The right to lease the minerals to an oil & gas company for exploration & production.
All Revenue Streams: Owners can receive all types of production- & property-related income, including lease bonuses, delay rental payments, and production royalties.

Royalty Interest (RI)

Created From Lease Agreements: Royalty interests are created when a mineral interest owner leases their minerals to an exploration & production company to extract the minerals.
Revenue Without Costs: Royalty interest owners receive a percentage of the revenue from mineral production without bearing any of the production costs.
Distinct From Mineral Interest: Although a mineral interest owner can and often does also come into possession of a royalty interest at the time of signing a lease (and therefore holds both interests at the same time), it is important to understand that the mineral interest ownership rights and the royalty interest which relates to a specific lease which was signed on those mineral interests are each distinct in that one could be sold while the other is retained. This is not especially common, but it does occur.

Working Interest (WI)

Operational Role: This refers to the interest that is created for the exploration & production company when a mineral owner signs a lease with them. This gives the exploration & production company (often called the “operator”) the right to explore, develop, and produce minerals on the leased mineral interests, but they must also bear all drilling, maintenance, and other production costs.
High Risk and Reward: This interest type carries the potential for high returns (since the operator receives a majority share of the income from wells drilled) but also comes with significant financial obligations & risks. If a well is drilled at great expense and only a small amount or no hydrocarbons are produced, this is called drilling a “dry hole” and means that the operator will sustain great financial losses related to the drilling of the well. The royalty interest owner, however, will sustain no losses.
Also Known As “Leasehold Interest”: Before wells are producing on a leased parcel of land, operators typically refer to their interest in the land as a “leasehold interest”. This is essentially a synonym for the term “Working Interest” but simply refers to the time period before production begins.

Overriding Royalty Interest (ORRI)

Carved from Working Interests: Overriding Royalty Interests are not tied to the ownership of minerals but to the proceeds from the sale of produced minerals under a given lease agreement. Operators create these interests artificially from the Working Interest produced upon their execution of a lease agreement with a mineral interest owner. ORRIs are not cost-bearing, similar to traditional royalty interests. After these interests are created, they can be sold and transferred until such a time as the associated lease expires. When the lease does expire, the ORRIs expire worthless along with the Working Interest. Note, however, that any producing well will ensure a lease is “held by production” and doesn’t expire until such a time as the well stops producing.
Common Origin: ORRI interests are typically created by operators as a form of incentive compensation to geologists, engineers, and landmen who work for them.

Non-Participating Royalty Interest (NPRI)

Mineral Interest With No Executive Rights: With this interest type, owners have financial interest in a particular mineral interest parcel, but they do not have the authority to lease the mineral interest to any party or receive lease bonuses or delay rental payments. They are paid purely on the basis of the production of minerals from the acreage (the royalty interest).
Common Origin: NPRIs are often created at the time of distributing an inheritance. By dividing a mineral interest in such a way that all but one divided part are NPRI, only one portion will retain the executive rights (to “speak for the acreage”) whereas revenue from production can be split evenly across all heirs.

Non-Operated Working Interest

A Passive Working Interest: With this interest type, owners do not participate in operational decisions but still share in production costs and revenues. These are created from the total Working Interest that is initially created when an operator signs a lease with a mineral interest owner.
Common Origin: Non-Op Working Interests can be created in many different ways, including as a result of a joint venture agreement between multiple operators, a risk mitigation effort of the operator, or as incentive compensation, similar to ORRIs.
Tax Benefits: Owners of Non-Op Working Interest bear more risk than other, non-cost bearing interest types, but they may receive tax advantages from incurring these costs without the responsibility of actually managing production operations.

Net Profits Interest (NPI)

Royalty Interest, With Some Deducted Costs: With this interest type, owners receive a share of the net profits from mineral production after certain costs are deducted. If, for example, substantial costs are required to transport produced hydrocarbons from the wellhead to be sold, an operator may negotiate for an NPI so that these costs can be deducted from royalty payments.
Non-Operational & Passive: Like RIs, NPRIs, & ORRIs, NPIs are passive and do not involve direct participation in production activities.

For the most part, Mineral Vault products include only the interest types MI, RI, NPRI, ORRI, and NRI. These interest types are passive from an operational standpoint and are not significantly cost-bearing.

What Are The Top Oil-Producing States In The US?

The Top 5 Oil-Producing States in America

1) Texas

The Lone Star State produced a whopping 5.41 million barrels per day of oil, accounting for 42.6% of America’s total production. Production has surged in the Permian Basin, leading to a sizeable five-year increase of 29.3% in the state.

In 2023, Texas broke America’s state record for oil production, producing 1.92 billion barrels, 51 million more than the previous record. The same year, it also broke the record for natural gas production by 13%, producing 12.01 trillion cubic feet.

2) New Mexico

New Mexico is the country’s second-largest oil producer, with 1.79 million barrels daily, giving it a 14.1% share of total production. The state has also benefitted from the Permian Basin effect by an incredible 190% surge over the past five years. Two of the state’s counties in the Basin accounted for 17% of all onshore oil output in the contiguous US last year.

Because of this natural gas production in the Basin, New Mexico’s annual state government income has increased by almost 50% over the past four years. The general fund surplus from this production through June 2025 was estimated at $3.5 billion in December 2023.

3) North Dakota

The Roughrider State is America’s third-largest oil-producing state, with 1.13 million barrels per day, which has decreased by 6.9% over the past five years. However, North Dakota’s production increased by 17% in 2022-2023, accounting for 8.9% of the country’s total oil production.

North Dakota’s Bakken Shale Formation has a large shale oil reserve and is home to Tioga, the state’s oil capital, in the middle of the Bakken fields. The freezing temperatures the state experiences in winter can disrupt production, but overall, production is predicted to increase.

4) Colorado

The Centennial State produces 0.44 million barrels per day, making it America’s fourth-largest oil-producing state. Over the past five years, its share of total production has increased by 1.2%, accounting for 3.5% of total American production.

Colorado’s increase in oil production over the last decade can be attributed primarily to the increased use of horizontal drilling and hydraulic fracturing. Technological advances have also allowed fewer rigs to produce more oil, with only 16 oil and gas rigs operating in the state today compared to 32 in 2019.

5) Alaska

The Last Frontier produces 0.44 million barrels of oil daily, accounting for 3.4% of the country’s total share. Despite experiencing an 11.2% decrease in production over the past five years, it’s still the fifth-largest producer in the country. It also has the fourth-largest crude oil reserves in the country, at 3.2 billion barrels, so it will likely remain a principal producer for years to come.

Much of Alaska’s oil comes from Prudhoe Bay, North America’s largest conventional oil field. The North Slope, the northernmost county in America, contains over a dozen other producing fields. Two major new developments are being developed on the North Slope, with the $2.6 billion Pikka project estimated to contribute 80,000 barrels daily upon completion.

So, That’s A Wrap!

America remains the world’s largest oil producer and a major consumer and importer of the resource. Despite challenges from the pandemic and geopolitical tensions, the country is poised to continue as a major oil producer with new oilfields approved by the next administration. The oil & gas industry is looking bullish in the U.S. for the foreseeable future.

If you’re interested to participate in the movement to tokenize investment in U.S. oil and gas properties, democratizing and globalizing access to these historically inaccessible investment properties, then check out the latest token offering on our home page or read more on our blog.