Overriding Royalty Interest Explained

Overriding Royalty Interest Explained

Here at LandGate, we welcome every call and online inquiry. 90% of the oil and gas-related calls we receive are from mineral rights owners that want to know what their minerals are worth or want us to market their minerals for lease or sale. Last week, a caller wanted to know if we could tell him the value of his overriding royalty interest and if there was a market to sell the overriding royalty interest. The answer is YES and YES.

To clear up some confusion, let’s first discuss the difference between a royalty interest and an overriding royalty interest.

Royalty Interest

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.

Overriding 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:

  1. 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%

  1. 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 on over 5 million oil and gas wells and permits covering every major basin in the United States. If you have an ORRI in a producing well, go to landgate.com and locate the well. Then click on the well, and our virtual data room will tell you exactly what a 1% royalty interest is worth in that well. And LandGate provides all this data for free.

Example of the 1% mineral royalty interest in a producing well.
Example of the 1% mineral royalty interest in a producing well from LandGate.com

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. Give us a call. We look for answering all your questions.

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