Oil and Gas Royalties, Overrides, ORRI and Lease Bonus Explained

Oil and Gas Royalties, Overrides, ORRI and Lease Bonus Explained

Oil and gas Mineral Owners are compensated for their minerals with lease bonuses and royalties. Other interest owners are compensated via well overrides and overriding royalty interest (ORRI).

Royalty Interests

Royalty Interests are the portions of the Net Revenue Interests (NRI) kept by a Mineral Owner (Lessor) when he/she leases the exploitation of his/her minerals to an Operator (Lessee). The percentages of Royalty interests and terms of the lease are traditionally negotiated between the Mineral Owner and a Landman/Attorney who will then flip the lease at a premium price to an Operator. Royalty interests typically range between 12.5 and 25%.

LandGate is disrupting this ‘traditional’ leasing business by putting the Mineral Owners property in front of several Operators obtaining the best offer and terms for the Mineral Owner.

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Royalty Payments

Royalty payments are calculated from any and all producing wells on the lease. It can happen that some wells are pooling from acreage in two leases (Drilling Spacing Unit – “DSU”), in which case the NRI of these wells towards the Royalty payments are calculated using the portion of the wells interests over the acreage of the Mineral Owner being pooled. Royalty owners get a share of the revenues from the wells pooling from their acreage based on their Royalty Interests and on the DSU of the wells. Royalty owners have no share of operator’s drilling, completions, and operating costs of the wells – they can’t lose money on a bad well!

The LandGate team can do this complex calculation on revenues for a Mineral Owner.

To model a 20% royalty on the LandGate.com/map, toggle the acreage selection, select the acreage where you have a royalty interest, and enter {WI = 0, NRI = 0.2} in the ownership section of the acreage selection.

 

Lease Bonus

A lease bonus is a one-time payment made to the Mineral Owner at the time the lease is signed. The amount of the bonus is determined in negotiations between the Mineral Owner (lessor) and the lessee and is usually calculated on a per acre basis. The Lease bonus, percentages of Royalty interests and terms of the lease are traditionally negotiated between the Mineral Owner and a Landman/Attorney that will then flip the lease at a premium price to an Operator.

LandGate is disrupting this ‘traditional’ leasing business by putting the Mineral Owners property in front of several Operators obtaining the best offer and terms for the Mineral Owner.

A Mineral Owner will receive royalty payments only if wells are producing over his/her property. When negotiating a Lease, it is important to consider which Operator will be the Lessee. If an Operator is unlikely to drill soon, then it is preferred to negotiate a larger Lease bonus rather than a large Royalty Interest, which is why it is better to negotiate straight with the Operator and not a Landman or Attorney that will then flip the property to highest bidder.

The LandGate platform and team can help Mineral Owners see Operators activities and understand the likelihood an Operator will drill in the near future. Check drilling and permitting activities in your area now 

 

If the Operator doesn’t drill within the lease term, then the lease ends, and the Mineral Owner can lease it again, getting the opportunity to get another Lease Bonus. The Lease is very likely to have clauses whereby if the Operator drills or starts drilling operations within the term of the lease, then the lease will be extended by six months to a year. If the Operator has a producing well on the property, then the lease will be Held By Production (HBP); therefore the lease term will be extended as long as there are producing wells on the property. This is the reason why sometimes Operators operate a well producing only a few barrels a day at losses to keep the lease HBP. When negotiating a lease, it can be advantageous to the Mineral Owner to set a minimum production to HBP the lease.

 

Well Override

A well override is the right to revenue (typically <2%) from well(s) production. It is generally given by the lessee to an entity that was involved with the mineral asset, but is not the current Mineral Owner. Typically a Landman or Attorney involved in the flip/sale of wells working interests, of minerals, or of a lease, will carve out an override on existing wells on the property during the transaction. A well override is specific to a well, which means that the override won’t apply to future wells drilled on the lease. The well override will end when the well stops to produce.

A 2% override interest is not in the minerals, but gives a 2% share of the revenues of the specific wells part of the override generated from producing those minerals , and it has no share of operator’s drilling, completions, and operating costs of the wells – no risk losing money on a bad well!

To model a 2% override on the LandGate map, select the wells where you have an override, and enter {WI = 0, NRI = 0.02} in the ownership section of the wells selection.

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Overriding Royalty Interest

What is ORRI? Its means Overriding Royalty Interest and refers to the percentage of revenues taken from the lessee’s Net Revenue Interests (NRI) in the well(s), and assigned to an entity other than the Mineral Owner. Typically a Landman or Attorney involved in the flip/sale of minerals or of a lease, will carve out an ORRI on the property during the transaction. An ORRI is specific to the lease, so it applies to any existing wells on the property and will also apply to any future wells. When the lease expires so do the terms of the ORRI.

A 2% ORRI applies to any well producing on the property and gives a 2% share of the revenues they generate. An ORRI has no share of operator’s drilling, completions, and operating costs of the wells – no risk losing money on a bad well!.

To model a 2% ORRI on the LandGate.com map, select the acreage where you have an ORRI, and enter {WI = 0, NRI = 0.02} in the ownership section of the acreage selection.

Check out our Map

 

Calculating Royalties

In some cases, Mineral Owners, elect to take the interest “in-kind’, where they actually take ownership of the oil and gas prior to sale but this is not the norm. Usually, the producer will sell all the oil or gas and the Mineral Owner royalty is calculated on that revenue.

Oil and gas producers measure volume of the gas and oil prior to selling. The price given for that measured volume varies based on the quality (including differentials and basin deductions) and the commodity prices of the month. The higher the oil density (= the lower the API gravity) and gas BTU (heat) content the better the quality. Impurities such as sulphur, hydrogen sulphide and carbon dioxide will drive that quality down. Once the oil and gas is sold, the Mineral Owners share is calculated  by multiplying the net acres in the Drilling Spacing Unit (DSU) by the base royalty. Formula similar to (net acres owned / acres in spacing unit) X  (base royalty). Income from royalties will be subject to taxes and would be reflected on a royalty check. If you need a valuation, contact us!

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Changes in Royalty Payments

Royalty payments will change depending on production rates, quality of the oil or gas, and commodity price.  

Well production will naturally decline over time, therefore a royalty owner should expect to see revenues decline over time. Production may also be intentionally choked back, or wells shut-in due to factors like inadequate pipeline or processing capacity, or operational issues with the well or facility.

The quality of the oil or gas may also change over time, usually decreasing in quality which will drive down the sale price. This is dependent on the reservoir and external influences that may have been used in completions or production of the reservoir.

Commodity price is the most unpredictable factor that can affect the revenues. Producers will often hedge oil and gas sales prices, so that swings in price do not make or break the company in the short term, however in most cases commodity price will impact revenues.

Non-Participating Royalty Interest

If you are concerned with an NPRI, which is a non-participating royalty interest then read our short definition here or contact us for help. An NPRI is an interest created from the mineral estate based on oil and gas production. The mineral owner in these cases has less say in what happens when compared to “royalty interest.” With a NPRI the royalty owner does not have a share in the bonus or rentals from the lease.

Unpaid Royalties

Before drilling a well, the Lessee/Operator will run title on the acreage associated with the well. The Operator will give the ownership as ‘Net Revenue Interests’ (NRI) to the company buying the crude oil from them, who then send checks to the NRI owners in the well.  If a mistake is made in the title work, royalty payments will not be sent. There are also instances where Mineral Ownership is unclaimed or has been abandoned. Although the state and the operators make efforts to ensure the Mineral Owners of the asset are identified, sometimes the owners are not found.  

Recovering unpaid royalties can be a very lengthy, complicated, and expensive process. LandGate can help you. If you would like more information about your specific royalty situation, or need help collecting on unpaid royalties please click here or call our team at 855-867-3876.

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