Overriding Royalty Interest Explained
Updated: Nov 3
To clear up some confusion, let’s first discuss the difference between a royalty interest and an overriding royalty interest.
Royalty inte rest.
When a mineral owner executes an oil and gas lease, the mineral owner (lessor) retains an oil and gas royalty , which is usually described in the lease as a fraction, such as 1/8th. A royalty is a portion of the proceeds from the sale of production. So if a well is successfully drilled by the operator (lessee), the mineral owner will receive an oil and gas royalty payment every month for as long as there is production on the leased lands or being allocated to the leased lands.
Overr iding Royalty Interest
An overriding royalty interest (ORRI) is similar to a royalty interest in that it is also a portion of the proceeds from the sale of production. However, it is not retained under the terms of the oil and gas lease. An ORRI is granted, assigned and created under the terms of a separate document. The most common documents used to create of ORRI are:
Assignment of an Overriding Royalty Interest
Assignment of Oil and Gas Lease, where the Assignor retains an ORRI
A couple of different scenarios:
Oil Company takes an oil and gas lease from Mrs. Smith, the mineral owner. In the lease, Mrs. Smith retained a 12.5% mineral royalty. Now, Oil Company owns the rights to 87.5% of the revenue, as 12.5% was retained by Mrs. Smith. As compensation for identifying the drilling locations, Oil Company assigns a 2% ORRI (in the lease from Mrs. Smith) to Mr. Geologist. When a well is successfully drilled on the lease, the revenue from the sale of production will be split:
Mrs. Smith- 12.5% Mr. Geologist- 2% Oil Company-85.5%
Mr. Landman is speculating that Oil Company will be interested in leasing minerals owned by Mrs. Smith.
Mr. Landman contacts her first and leases Mrs. Smith’s minerals. The lease provides for a 12.5% royalty. Oil Company wants to drill on Mrs. Smith’s minerals but now has to negotiate a deal with Mr. Landman. Mr. Landman agrees to assign the lease to Oil Company and reserves a 5% ORRI. When a well is successfully drilled on the lease, the revenue from the sale of production will be split:
Mrs. Smith- 12.5% Mr. Landman- 5% Oil Company- 82.5%
An overriding royalty interest:
Is carved out of the working interest (oil company) share of production
Is not ownership in the minerals, but in the proceeds from the sale of oil and gas
Is free from the drilling and completion costs
Is “tied” to the oil and gas lease. When the lease expires, so will the ORRI Buying and Selling ORRIs is a big business. LandGate maintains well and production data for over 5 million oil and gas wells and permits covering every major basin in the United States. To view well-specific data, check out our LandApp tool !
Whether you are receiving monthly ORRI checks or not, LandGate can market your ORRI to get you the most money. At LandGate, we want to make you an informed ORRI owner. Run a completely free property report to become more informed. After you've reviewed the information, consider listing absolutely free on LandGate's open marketplace.
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Overriding Royalty Interest (ORRI) (US)
- A percentage of gross production that is not charged with any expenses of exploring, developing, producing, and operating a well.
- a working interest owner assigning an ORRI to pay a debt or to pay a landman's commission for acquiring leases; or
- a lessee reserving an ORRI when assigning oil & gas leases to another party (who becomes the new lessee under the leases).
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- Mineral Management
What is Overriding Royalty Interest and How to Value it?
If you have decided to invest in a mineral lease, your timing could not be better. The current slowdown in oil and gas drilling activity during the COVID-19 pandemic provides investors an opportunity to invest in leases at a discount to their future market value. The peak of the shale boom could be ahead of us.
But which type of mineral interest should you invest in — ORRI, RI, WI? The acronym soup can be confusing.
This article explains the overriding royalty interest (ORRI) , opportunities to receive a portion of ORRI revenues free of production costs, and how to value, research ownership, and find the best opportunities to buy and sell ORRI interests.
What is an overriding royalty interest in oil and gas?
An overriding royalty interest (ORRI) is an undivided interest in a mineral lease giving the holder the right to a proportional share (receive revenue) of the sale of oil and gas produced. The ORRI is carved out of the working interest or lease.
Now, let’s dig a bit deeper.
When landowners separate subsurface rights from the surface rights of a parcel of land, two mineral estates are created:
- Working Interest (WI)
- Royalty Interest (RI)
Oil and gas companies lease subsurface rights from mineral owners through a working interest lease to explore, drill and produce the mineral reserves.
In exchange, a landowner receives a royalty interest in the mineral estate.
Usually, oil and gas companies grant ORRIs to fund operations to investors ; and geologists, landmen , and lawyers as compensation for their services.
Unlike a working or royalty interest, an ORRI cannot be fractionalized.
It is an undivided, non-possessory right to a share of the production, excluding the mineral lease’s production costs.
What is the difference between an overriding royalty interest and royalty interest?
Holders of overriding royalty interest, also called the land owner’s interest, have executory rights over the mineral rights .
They may divide the mineral rights and lease them to third parties. They receive a signing bonus, lease payments, and royalty payments on production based on their proportional ownership in the mineral rights in exchange for leasing ownership rights.
The royalty mineral owner retains ownership of the interest after production stops.
Holders of overriding royalty interests have no ownership rights to the minerals under the ground but a non-possessory undivided interest. They have an interest in the working oil or gas lease of the E&P company. This interest gives them the right to royalty payments on the proceeds of selling the oil and gas produced. When the lease expires, the interest reverts to the mineral estate.
What factors determine overriding royalty interest value?
Several factors determine the value of an overriding royalty interest in a working lease. They include:
- Location – A mineral interest in high producing shale basins will be more valuable.
- Producing Wells – Producing wells are valued higher than non-producing wells. The life of the producing well should also be considered.
- Production Levels and Reserves – Wells with high producible reserves generate higher revenues from oil and gas sale. As technology improves, more oil gas companies are increasing their estimates of producible reserves.
- Oil and Gas Prices – If oil and gas prices decline, revenues will decline, and operations may no longer be economical.
The most important factors in the calculation of overriding royalty interest value are:
- Lease Terms – Royalty payments in hot shale plays have reached 25 percent, double the average.
- Working Interest (WI) Value – Since the overriding royalty interest (ORRI) is a portion of the working interest, the WI value is the major determinant of the value of overriding mineral rights. The WI owner incurs all of the costs associated with exploration and development activity. All of the profits (revenues – costs) go to the owner after revenues are paid on any share in the mineral rights leased to third parties.
- Royalty Interest (RI) Value – The RI holder has the first right to revenues. The ORRI lease holder’s proportional share is based on the WI revenues after the royalty mineral owner receives their share. The RI holder’s share of the working interest is typically 12.5–25 percent of the mineral reserves’ revenue under the WI.
Because overriding royalty interests entitle the holder to a share in the production, not the mineral lease, when the wells are no longer economical to produce, the ORRI lease expires.
How Do Overriding Royalty Interest Payments Work?
The value of an overriding royalty interest is simple to calculate since it is a percent of the working interest lease. The ORRI value is based on production on the acreage leased by the working interest.
Let’s say hotshot geologist is confident a 100,000-acre parcel in the Texas Permian Basin will produce oil.
Big Oil Co. gives him a 5 percent ORRI in exchange for his geology reports. Hotshot geologist’s production share would represent 5 percent of the total production on the net acreage, or revenues on 5,000 net acres.
The revenues from the WI production depend on the price of oil and gas produced from the wells on the subject acreage and the number of reserves. If oil and gas prices decline, but oil and gas companies report higher reserves, the higher reserves could offset any decline in fossil fuel prices.
The working interest holder pays for all costs of production. Although depending on the state in which the wells are drilled, the ORRI royalty payments may be net the post-production costs.
The oil and gas company starts producing the oil and generating revenues of $1 million a month. The ORRI holder, however, will not receive 5 percent of $1 million in revenues. First, Big Oil Co. must pay the royalty interest owner his stake. Let’s say the original mineral estate owner, or landowner, retained a royalty interest of 25 percent (20 percent plus 5 percent in signing bonuses) in the mineral estate.
How to calculate the overriding royalty interest?
The revenue remaining after the RI is paid out of the WI is called the net revenue interest (NRI). If you are the lessor of an ORRI, you will receive your proportional share of the working interest lease based on the net revenue interest (NRI).
NRI = Working Interest — Royalty Interests
The royalty owner receives monthly royalty payments for 25 percent of the monthly proceeds from the sale of $1 million. If the RI is 25 percent, the NRI calculation is:
- 100 — 25 = 75 percent (NRI)
- $1,000,000 — $250,000 = $750,000 (monthly NRI)
A hotshot geologist would then receive monthly royalty checks on 5 percent of the NRI.
- ORRI = NRI * 5 percent
- $750,000 * 0.005 = $3,750
Example of an Overriding Royalty Interest
Grandpa Jones owns 25 percent of the royalty interests on the mineral estate on his tract of land in Oklahoma. Owing to new fracking technology, the oil and gas producer increases production. As the mineral owner, Grandpa Jones’ monthly royalty payments jump ten-fold. He wants to share the mineral wealth with his two grandchildren, who will eventually need money for college and a first home purchase.
Grandpa Jones owns a royalty interest and not a non-participating royalty interest (NPRI) or ORRI. He has executory powers to divide his RI into more leases. He bequeaths the full RI rights to his son, who also benefits from signing bonuses and rent payments. He then carves out two overriding mineral interests of 6.25 percent for his two grandchildren. In this way, his son maintains executory powers over the royalty rights, while the young grandsons only benefit from production revenues.
ORRI cost deductions
Although the overriding royalty interest holder is not responsible for oil or gas production costs, an ORRI or RI holder may be responsible for post-production costs.
Post-production costs include:
- Marketing expenses
The issue of whether or not the holders of overriding royalty interests should pay their share of post-production costs has kept courts across the land busy for several decades. The treatment varies from state to state and continues to be contested by the oil and gas industry and mineral owners. In Texas, a 1996 ruling, upheld by a 2015 Texas Supreme Court decision , apportioning a share of post-production costs to the ORRI lessor has prevailed.
We advise having a mineral expert in the relevant states carefully review the contract terms. Inexperienced mineral buyers often turn to online calculators to determine their expected future royalty streams, without checking if the lease includes post-production costs or if a clause has been added excluding these costs.
Overriding royalty interest taxation
Owing to favorable tax treatments, royalty leases, and trusts can provide tax advantages over other investment securities. Depending on the well’s location, royalty income on an overriding royalty lease could be taxed on three levels if the county also imposes a tax.
- Federal income tax – The overriding royalty interest holder pays taxes on revenues received as royalty payments. ORRI income is treated as investment income and therefore taxed as ordinary income. Oil and gas income investment is taxed at the lower end of the capital gains tax rate. A depletion allowance of up to 15 percent, a depreciation deduction, is another oil and gas production tax advantage.
- State severance taxes – Both resource producers and royalty interest owners are subject to severance taxes . A severance tax is a tax on the removal of natural resources for sale in another state.
- County ad valorem taxes – Ad valorem oil and gas taxes are a form of sales tax charged on production ( oilfield glossary )
Since overriding royalty interest owners do not share in the production costs, they are not deductible from taxes. In the case post-production costs such as marketing expenses are deducted from royalty payments, these expenses are deductible.
How to search for inherited ORRI
If you want to research the land title of a tract of land, detailed records are kept of all land transactions in the local land titles office. If you want to find out if you inherited your father’s overriding royalty interests, the search process is more complicated.
- Land titles search – In the case of inheritances, lawyers often file mineral deeds in the land titles office of the local county clerk’s office as part of the estate probate process. However, no law requires the registration of mineral deeds.
- Mineral Registries – In many states, public or private mineral deed registries are maintained. This is often the first place an oil and gas company will look when seeking to lease your mineral rights. They will send a letter to the last known address. It is well worth your while to do a mineral deed search and ensure your records and current address are up-to-date.
Should you buy or sell ORRI?
Overriding royalty interests are an important financing tool for oil and gas companies involved in the exploration and development of oil gas and mineral interests. For investors, they provide an opportunity to participate in mineral production without incurring the costs.
Why might you want to invest in ORRI?
If you are seeking to buy overriding royalty interests, you have not missed the shale boom. Only about 20 percent of recoverable unconventional reserves with production potential have been tapped. It’s a good time to buy if you are:
- Looking to buy low at current undervalued prices.
- Adjacent to properties in which oil and gas companies are actively taking an interest.
- Seeking passive income through royalty payments.
- Searching for more favorable leasing terms, potentially double the 12.5 percent average in productive shale basins.
- Wanting to meet personal expenses but do not want to miss out on future income potential in mineral development.
Why sell your ORRI?
Since the ownership of overriding royalty interests is broad and extends beyond the typical investor base, owners have diverse reasons to sell.
Remember, an overriding royalty interest is an undivided interest, so the owner cannot divide the mineral rights and sell them.
It’s a good time to sell if you are:
- Seeking to sell inherited ORRI or other mineral interests while exploration and production activity is high. Your old dried-up well may now be sitting on a hot shale play.
- Holding a lease that will soon expire and want to sell while the interest still holds value.
- A professional granted royalty interests in exchange for work and want to sell while demand is high.
- Wanting to use the proceeds from the sale of oil and gas to meet financial goals such as a home mortgage or college education for children.
- Looking to sell or swap them to consolidate royalty interests in a particular basin or on a tract of land.
Now that you understand the opportunity and how to value an overriding royalty interest, how do you determine the opportune time to buy or sell? Which basins and parcels will provide the most upside?
You may decide to sell the mineral rights on your father’s land, only to later find out that an oil company is buying up rights at a premium on adjacent lands. The answer depends on the past, current, and future value of mineral rights and those on surrounding tracts, as well as dozens of other factors.
A broker or other mineral rights contract specialist can help you determine the true value of mineral rights and the options and best time to monetize them.
3 responses to “What is Overriding Royalty Interest and How to Value it?”
My aunt has ORRI portfolio in Oklahoma. She is wanting to sell her portfolio. How do I calculate how much to ask for?
[…] holders of overriding royalty interests (RIs) are entitled to a share of the production revenue during the lease. There are many ways to […]
Very informative quite allot to go through just found leases already have deed
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Assignment of Overriding Royalty Interests definition
Examples of assignment of overriding royalty interests in a sentence.
Grades 2 and 3 also have access to iPads as well as computers in the technology lab.
The “Closing” shall be the actual delivery and acceptance by and between Seller and Purchaser of the Partial Assignment of Overriding Royalty Interests attached hereto as Exhibit “A” (the “Assignment”) and the Certificate of Non-Foreign Status attached hereto as Exhibit “B” and simultaneous payment by Purchaser of the Purchase Price.
SWEPI AMI Leases, effective April 1, 2014, as described on Exhibit A attached to the Assignment of Overriding Royalty Interests between Ultra Resources, Inc.
The overriding royalties conveyed by Assignor to Masters Pipeline, L.L.C., by Assignment of Overriding Royalty Interests of even date herewith recorded or to be recorded in Chambers and Galveston Counties, Texas, and all overriding royalties held by individuals associated with Assignor as of the Effective Time.TO HAVE AND TO HOLD, all and singular, the Assets unto Assignee and Assignee’s successors in title and assigns forever.
Assignment of Overriding Royalty Interests dated May 14, 2008 (Long Override) Surface Rights Nil Title Documents See the attached 111 page Mineral Property Report dated July 13, 2009 SCHEDULE "B" THIS PAGE AND THE FOLLOWING 4 PAGES COMPRISE SCHEDULE "B" ATTACHED TO AND FORMING PART OF AN AGREEMENT OF PURCHASE AND SALE MADE AS OF THE 27th DAY OF AUGUST, 2009 BETWEEN MEGAWEST ENERGY MISSOURI CORP.
Seller shall execute and deliver at Closing to Purchaser: (1) an Assignment of Record Title Interest and Xxxx of Sale for Vermilion 215 Field; (2) an Assignment of Overriding Royalty Interests ; (3) an Assignment of Operating Rights; and (4) an Assignment of Interests in Xxxxx.
Pursuant to that certain Partial Assignment of Overriding Royalty Interests from Seller to Purchaser, dated October 27, 2011, but effective as of August 1, 2011, and filed in the Non-Required Filings with the Gulf of Mexico Regional Office of the Bureau of Ocean Energy Management, Purchaser acquired an undivided twenty percent (20%) of Seller’s right, title and interest in and to the Original Royalty, insofar but only insofar as, the Original Royalty burdened the Leases (the “ Prior Purchaser Conveyance”).
When you have received my approval to proceed, you will record the following documents in the order listed, in all three counties: (i) Assignment of Overriding Royalty Interests ; (ii) Assignment of Working Interest in Oil and Gas Leases; and (iii) Recording Supplement to Operating Agreement.
Assignment of Overriding Royalty Interests Petroleum Exploration Licence 444 dated 24 February 2014 between Holloman Energy Corporation, Holloman Petroleum Pty Ltd and LPD Investments Ltd.
On May 15, 2006, RMEexecuted an Assignment of Overriding Royalty Interests (“the Assignment”) assigning various overriding royalty interests1 in the Subject Leases to the “Stuber Group.” The Plaintiffs are members of the Stuber Group or successors in interest.
Related to Assignment of Overriding Royalty Interests
Overriding Royalty Interest means an interest in the natural gas and oil produced under a Lease, or the proceeds from the sale thereof, carved out of the Working Interest, to be received free and clear of all costs of development, operation, or maintenance.
Royalty Interest is defined in Section 1.01.
Royalty interest owner means a person or the estate of a person, other than a working interest owner, who owns the right to or interest in any portion of the oil and/or gas, or proceeds from the sale thereof, from a tract.
Leasehold Interests means all of each Loan Party’s right, title and interest in and to, and as lessee of, the premises identified as leased Real Property on Schedule 4.4 hereto.
Royalty Agreement means the amended royalty agreement between the Partnership, Vermilion, 1209963 Alberta Ltd. and the Trust dated January 22, 2003 providing for the creation of the Royalty;
Assignment of Leases With respect to any Mortgaged Property, any assignment of leases, rents and profits or similar agreement executed by the Mortgagor, assigning to the mortgagee all of the income, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of such Mortgaged Property, in the form which was duly executed, acknowledged and delivered, as amended, modified, renewed or extended through the date hereof and from time to time hereafter.
Leasehold interest means the interest of the lessor or the lessee under a lease contract.
Assignment of Leases and Rents With respect to any Mortgaged Property, any assignment of leases, rents and profits or similar instrument executed by the Obligor, assigning to the mortgagee all of the income, rents and profits derived from the ownership, operation, leasing or disposition of all or a portion of such Mortgaged Property, whether contained in the Mortgage or in a document separate from the Mortgage, in the form that was duly executed, acknowledged and delivered, as amended, modified, renewed or extended through the date hereof and from time to time hereafter in accordance with the Credit and Collection Policy.
Recorded Leasehold Interest means a Leasehold Property with respect to which a Record Document has been recorded in all places necessary or desirable, in Collateral Agent’s reasonable judgment, to give constructive notice of such Leasehold Property to third-party purchasers and encumbrancers of the affected real property.
Assignment of Lease means the Assignment of Leases and Rents dated as of the Initial Closing Date from the Lessor in favor of the Administrative Agent for the benefit of the Lenders, as amended, supplemented or otherwise modified from time to time in accordance with the terms thereof or of any other Operative Agreement.
Intangible Property All accounts, proceeds of accounts, rents, profits, income or revenues derived from the use of rooms or other space within the Premises or the providing of services in or from the Premises; documents, chattel paper, instruments, contract rights, deposit accounts, general intangibles, commercial tort claims and causes of action, now owned or hereafter acquired by Tenant (including any right to any refund of any Impositions) arising from or in connection with Tenant’s operation or use of the Premises; all licenses and permits now owned or hereinafter acquired by Tenant which are necessary or desirable for Tenant’s use of the Premises for the Primary Intended Use, including, if applicable, any certificate of need or similar certificate; the right to use any trade name or other name associated with the Premises; and any and all third-party provider agreements (including Medicare and Medicaid, if applicable), Investment Amount: The sum of Acquisition Price, plus all Capital Addition Costs funded by Landlord, if any.
Assignment and Conveyance Agreement As defined in Subsection 6.01.
Assignment of Rents and Leases means, with respect to the Mortgaged Property, an Assignment of Rents and Leases (and, if there are more than one, each and every one of them), dated as of the Closing Date, granted by the Borrower to Lender with respect to the Leases, as same may thereafter from time to time be supplemented, amended, modified or extended.
Oil and Gas Leases means all leases, subleases, licenses or other occupancy or similar agreements (including any series of related leases with the same lessor) under which a Person leases, subleases or licenses or otherwise acquires or obtains rights to produce Hydrocarbons from real property interests.
Oil and Gas Interests means: (a) direct and indirect interests in and rights with respect to oil, gas, mineral and related properties and assets of any kind and nature, direct or indirect, including, without limitation, working, royalty and overriding royalty interests, mineral interests, leasehold interests, production payments, operating rights, net profits interests, other non-working interests, contractual interests, non-operating interests and rights in any pooled, unitized or communitized acreage by virtue of such interest being a part thereof; (b) interests in and rights with respect to Hydrocarbons and other minerals or revenues therefrom and contracts and agreements in connection therewith and claims and rights thereto (including oil and gas leases, operating agreements, unitization, communitization and pooling agreements and orders, division orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales, exchange and processing contracts and agreements and, in each case, interests thereunder), and surface interests, fee interests, reversionary interests, reservations and concessions related to any of the foregoing; (c) easements, rights-of-way, licenses, permits, leases, and other interests associated with, appurtenant to, or necessary for the operation of any of the foregoing; (d) interests in oil, gas, water, disposal and injection xxxxx, equipment and machinery (including well equipment and machinery), oil and gas production, gathering, transmission, compression, treating, processing and storage facilities (including tanks, tank batteries, pipelines and gathering systems), pumps, water plants, electric plants, gasoline and gas processing plants, refineries and other tangible or intangible, movable or immovable, real or personal property and fixtures located on, associated with, appurtenant to, or necessary for the operation of any of the foregoing; and (e) all seismic, geological, geophysical and engineering records, data, information, maps, licenses and interpretations.
Assignment and Conveyance An assignment and conveyance of the Mortgage Loans purchased on a Closing Date in the form annexed hereto as Exhibit 4.
Subject Properties has the meaning specified in Section 5.13(a).
Undeveloped Property means all Assessor’s Parcels of Taxable Property which are not Developed Property.
Net Smelter Returns means the actual proceeds received from any mint, smelter or other purchaser for the sale of bullion, concentrates or ores produced from the Property and sold, after deducting from such proceeds the following charges to the extent that they are not deducted by the purchaser in computing payment:
Real Property Interests means all interests in real property of whatever nature, including easements, whether as owner or holder of a Security Interest, lessor, sublessor, lessee, sublessee or otherwise.
Undeveloped Land means (i) land owned in fee by the Company or any Subsidiary as of December 31, 2011 which at the time of determination has not been developed for commercial or residential purposes, (ii) land acquired by the Company or any Subsidiary subsequent to December 31, 2011 pursuant to a Code section 1031 like-kind exchange (in exchange for land described in clause (i) or (ii) of this definition) which at the time of determination has not been developed for commercial or residential purposes, or (iii) capital stock or other equity interests of a Subsidiary which owns as its principal asset, directly or indirectly, Undeveloped Land described in clause (i) or (ii) of this definition.
Conveyance Agreement means the Conveyance Agreement Master Securitization Terms Number 1000, dated February 29, 2008, as amended and reaffirmed from time to time, among the Master Depositor, Deutsche Bank Trust Company Americas (as successor in interest to The Bank of New York Mellon Trust Company, National Association, formerly known as The Bank of New York Trust Company, N.A.), as eligible lender trustee for the benefit of the Master Depositor, VL Funding, as the depositor, Deutsche Bank Trust Company Americas (as successor in interest to The Bank of New York Mellon Trust Company, National Association, formerly known as The Bank of New York Trust Company, N.A.), as eligible lender trustee for the benefit of VL Funding, and Xxxxxx Xxx, Inc., as master servicer, together with each executed Purchase Agreement (as defined therein), each executed Xxxx of Sale (as defined therein) and all attachments thereto.
Mineral means gas, oil, and coal; other gaseous, liquid, and solid hydrocarbons; oil shale; cement material; sand and gravel; road material; building stone; chemical raw material; gemstone; fissionable and nonfissionable ores; colloidal and other clays; steam and other geothermal resources; and any other substance defined as a mineral by a law of this state.
Royalty owner means any owner of oil and gas in place, or oil and gas rights, to the extent that the owner is not an operator as defined in subsection (17) of this section;
Mining Lease means the Mining Lease granted pursuant to Clause 5 and according to the requirements of the context shall describe the area of land demised as well as the instrument by which it is demised;
Royalty means an interest in an oil and gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage.
What Are Overriding Royalties Interests?
An ORRI is an undivided interest in a mineral lease that gives you the right to a proportional share of the gas and oil that is produced. The overriding royalty interest is carved from the lease or working interest. Learn more about this below, and give Nix Patterson a call if you have questions about your interest structure.
Overriding Royalty Interest Overview
When property owners separate surface rights from subsurface rights, two mineral estates are produced: working interest (WI) and royalty interest (RI). Oil and gas companies frequently lease subsurface rights from the property owner with a working interest lease that allows the company to explore, drill, and produce oil and gas. In return, the property owner receives a royalty interest.
Typically, the oil and gas company will grant an ORRI to fund oil and gas operations to investors, landmen, geologists, and attorneys to compensate them. However, unlike royalty and working interests, an overriding royalty interest cannot be fractionalized unlike royalty and working interests. The ORRI is a non-possessory, undivided right to a share of the oil and gas production, but it excludes the production costs of the mineral lease.
Also, an ORRI is related to a royalty interest because it is part of the proceeds from the production sale. But an ORRI isn’t retained according to the oil and gas lease terms. Instead, an overriding royalty interest is assigned, granted, and created in the terms of another document. The most common documents that create an overriding royalty interest are Assignment of an Overriding Royalty Interest and Assignment of Oil and Gas Lease. The ORRI is not carved out of the regular royalty interest but rather out of the oil and gas company’s working interest, further reducing the oil and gas company’s share of the proceeds they will receive when they sell the minerals.
Differences Between ORRI and RI
A land owner with an ORRI has executory rights over the property’s mineral rights. This means they can divide mineral rights and write leases with other parties. When they do so, they get a signing bonus, payments on the lease, and royalty payments on oil and gas produced based on the proportion of their ownership of the mineral rights. This is in exchange for the leasing of the ownership rights. Also, the royalty mineral owner keeps ownership of the interest after oil and gas production ceases.
An ORRI holder does not have ownership rights to the minerals under the property, Instead, they have a non-possessory undivided interest. They own an interest in the lease rights (or working interest) of the exploration and production company. Granting ORRIs is a way for the oil and gas company to raise money to fund their operations. An ORRI allows the holder to receive royalty payments when the oil and gas generated are sold. After the lease is over, the interest goes back to the mineral estate.
What Determines the Value of an Overriding Royalty Interest?
Several things determine what the ORRI value is, including:
- Mineral interest location. One in a shale basin with high production is worth more.
- Producing oil and gas wells. Wells currently producing are valued more. How long the well can produce is also essential.
- Production reserves and levels. Oil and gas wells featuring high producible reserves offer higher revenues when the oil and gas are sold. Producible reserves are rising as technology gets better.
- Prices. Oil and gas price declines cause revenues to decline, so continued operations may not be profitable.
How Is Overriding Royalty Interest Calculated?
ORRIs are carved from the working interest in the oil and gas lease and not according to acreage, so determining the calculation is simple. The ORRI is just a straight percentage and can negotiated.
For instance, a 2% override would show on the royalty statement as a .02% interest in the revenues from selling leased oil and gas. But the details of the ORRI hinge on the language in the contract. The override could be interpreted literally or contain proportionate reduction language. This is why it is always wise to have an oil and gas attorney review your oil and gas lease.
Contact Our Nix Patteson Oil and Gas Lawyers
If you or your company have questions about ORRIs, RIs, and related matters, Nix Patterson can assist. Please contact our oil and gas attorneys today for a complimentary consultation about your overriding royalty interest or royal interest legal issues.
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Monthly Royalty Revenue
What is an Overriding Royalty Interest?
An Overriding Royalty Interest IORRI), commonly referred to as an override, is a fractional, undivided interest granting the right to receive proceeds from the sale of oil and gas. It is not an interest in the minerals themselves, but rather in the proceeds of the sale of oil and gas. ORRIs are often assigned to geologists, petroleum engineers, landmen, and other professionals as compensation for their services.
Overrides are cost-free.
Image Description: Picture of an oil well in North Dakota, surrounded by snow.
Calculating Overriding Royalty Interest
Because Overriding Royalty Interests are carved out of the working interest in an oil and gas lease and is not based on acreage, the calculation is simple.
An ORRI is a straight percentage.
For example, a 2% override would appear on the royalty statement as 0.02 interest in the proceeds from the sale of the leased hydrocarbons.
The exact details of an override are dependent on the language. ORRIs can be interpreted literally or may have proportionate reduction language. It is always good to have an attorney review the ORRI language and the oil and gas lease.
Just like any other mineral right, ORRIs can be purchased or sold.
Overriding Royalty Interest Example
The mineral estate can be severed from the surface, beginning two separate chains of title. The mineral owner has the right to explore and develop the minerals, but the vast majority do not have the finances or knowledge to drill and operate a well.
Instead, most mineral owner lease their mineral rights. When this happens, the oil and gas company receives the vast majority of the revenue (usually 75 – 87.5%) and the mineral owner reserves 12.5% – 25%. In exchange for taking a smaller percentage, the mineral owner does not have to pay any of the costs associated with drilling or operating the well.
Because drilling a well is very expensive, with most of the costs incurred before the well begins producing, operators often grant landmen, geologists, petroleum engineers, and other professionals an Overriding Royalty Interest in the lease. The override is usually a small percentage that is carved out of their 75% working interest.
Overriding Royalty Interest (ORRI) can be assigned at any time. A landman may agree to acquire leases for XYZ Oil and Gas Company in exchange for 50% cash and 50% ORRI (value = 0.05 ORRI) on future wells drilled on a specific tract (or tracts) of lands. However, the ORRI will not be of economic value until an economically producing well is drilled, at which point the landman will receive his or her share of the royalties. ORRIs may also contain proportionate reduction language.
A lot of ORRI’s are sold in the first three months of production, before the well declines in value (and before anyone really knows how successful the well will be). This is a way for the owner to turn ORRI’s into cash.
Image Description: Pie chart showing the working interest, royalty interest, and overriding royalty interest.
Image Description: Screenshot of a royalty statement showing the type of interest.
How To Find Out if You Own an ORRI
You might have inherited an Overriding Royalty Interest (ORRI) and not realize it. How do you find out?
Your royalty statement or division order will probably indicate the type of mineral right that you own. ORRIs are abbreviated as O or OR. On EnergyLink, statements are more uniform, so you might see the word “Override Interest” spelled out (see example image).
Finding your ORRI in the Deed Records
Running the title is not as difficult as it sounds.
First, locate the county office where deed records are kept. This is often the County Clerk or the County Courthouse. Some states have an office for the “Recorder of Deeds” or the “Register of Deeds”.
Search Google for: [state] + deed records
Some counties have online records going back a few decades. Others do not. If you live closeby, you can search the deed records in person and perhaps enlist the assistance of the people working there. Being able to ask questions can be really valuable – especially when you get stuck, are having trouble reading hand-written documents, or are unsure of what something means.
What to Search For:
There are two main ways to search the deed records. The most obvious way is to enter your name (or the name of relatives who have passed away) into the grantor/grantee search box. The other is to search by legal description. You will need to follow the chain of title back to the land patent (when the land was first granted by the government).
You are looking for:
- Oil and Gas Leases
- Mineral Deeds
- Conveyance Documents
- ORRI Assignments
- Deeds (sometimes minerals are reserved or granted or a deed might reference a previous reservation)
When to Hire a Landman If you want to perform a title search yourself, or you try but get stuck, you can hire a landman to search the records for you. Most landmen are highly skilled in running title, spending much of their careers searching for mineral owners for companies that want to extract oil and gas from a specific tract of land.
Image Description: Screenshot of an old oil and gas lease and Assignment of Overriding Royalty Interest from the deed records.
Image Description: Example Ad Valorem property tax statements from two Kansas counties.
Paying Taxes on Your ORRI
Like all mineral rights, ORRIs are subject to three types of taxes:
Federal Income Tax:
Oil and gas royalties, including ORRIs, are taxed as ordinary income because the IRS classifies them as investment income. ORRIs qualify for a depletion deduction of 15% (check with your accountant for more info).
State Income Tax (for states that have income taxes):
Oil and gas royalties are subject to state income taxes in states with a state income tax. You will need to file state states in each state where you receive oil and gas royalties.
Severance taxes are automatically deducted from your royalty statement.
County Ad Valorem Tax:
Each county collects Ad Valorem taxes for overriding royalties. You should receive an annual bill from the county. In some states, such as Oklahoma, the Ad Valorem taxes are deducted from your check and paid by the operator.
How We Value Overriding Royalties
Minerals in the hottest shale plays are more valuable than those in older fields with conventional wells.
Producing vs. Non-Producing
Producing minerals are often worth more than non-producing minerals because they are generating revenue.
Oil & Gas Prices
When oil and gas prices drop, revenue drops, and sometimes operators are unable to continue operating the well.
Highly productive wells (and off-set wells) can increase the value of your minerals.
Favorable lease terms (such as a 25% royalty reservation) positively impact the value of the leased minerals.
A small number of operators are unethical, and their reputation automatically devalues your minerals.
Where We Buy ORRIs
We buy mineral rights, including overrides, in all oil and gas states. However, we are especially interested in Texas and Kansas mineral rights.
We even buy minerals in more obscure states, such as Michigan and Illinois , which produce very little oil and gas compared to other states.
Why People Sell Their Mineral Rights
I am putting my affairs in order. I don’t want to burden my kids with the hassle of transferring ownership and managing small mineral rights. When my sister passed away, my niece and nephew had to hire an attorney to help them with the minerals. I don’t want my kids to go through that.
I inherited my mineral rights so they were sentimental, but I don’t really want to bother with managing them and filing extra tax returns. I decided to sell and use the money as a down payment on my house.
I had no idea how fast the oil production would decline. My checks are only 20% of what they were a few years ago. I should have sold my mineral rights when the wells were brand new and still generating huge royalties.
My oil wells have been producing for decades and the reserves are almost depleted. Once the wells are plugged, the value will be significantly lower. I’d rather cash out now.
I inherited mineral rights, but don’t want to be involved with fracking and fossil fuels. I would prefer to support renewable energy and do my part to reverse climate change.
State (mineral location)
County/Parish (mineral location)
- Practical Law
Assignment of Overriding Royalty Interest (TX)
Practical law standard document w-036-7316 (approx. 10 pages).
- United States
Information and Procedures for Transferring Overriding Royalty Lease Interests on Oil and Gas and Geothermal Leases
Jun 16, 2023 • knowledge, information.
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