What are oil and gas mineral, royalty and overriding royalty interests?

 

A: Oil and gas minerals, royalties and overriding royalties are similar in that they all receive revenues from the production of oil and gas from a well, and they do not pay for the drilling or monthly operating expenses of the well. Often you will see the term "royalties" used interchangeably to mean either mineral interests, royalty interests or overriding royalty interests. However, there is a slight difference between minerals and royalties, and there is an even greater difference between overriding royalties and both minerals and royalties.

Mineral interests and royalty interests are similar in that both involve ownership of minerals under the ground. They both receive a portion of the income from the production of oil and gas. The main difference is that the owner of a mineral interest also has the right to execute leases and collect bonus payments, and the owner of royalty interests does not execute leases or collect bonus payments. Both mineral and royalty owners receive income once the well is producing, but only the mineral owner receives the up-front bonus payment.

Unlike mineral and royalty interests, overriding royalty interests do not constitute an ownership of minerals under the ground. Instead, overriding royalties constitute ownership of a portion of the revenues generated from oil and gas production, and the ownership expires when the lease has been abandoned due to cessation of production. Overriding royalties are created from the working interest. For example, Bob Jones (a land man) may have secured the leases for a well that ABC Oil Company is going to drill. Instead of a cash payment for his services, Bob Jones may have received a 1% overriding royalty interest in the well. If the well is successful, then Bob Jones will receive 1% of the revenues generated from oil and gas sales.

Like mineral and royalty owners, the owner of an override also receives a portion of the income from the production of oil and gas. The main difference is that the owner of an overriding royalty does not own the minerals under the ground, only proceeds from the production of minerals. Once the lease has expired and production has ceased, the overriding royalty interest expires. Conversely, the owners of minerals and royalties maintain their ownership after production ceases.





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