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.