Navigating the complex landscape of oil and gas interests can be a daunting task for both newcomers and seasoned professionals in the industry. From mineral rights to royalty shares, the various types of interests represent different sets of rights, responsibilities, and financial benefits. In this blog, we will demystify these different categories, explaining each type of interest—such as Mineral Interest, Royalty Interest, Working Interest, Overriding Royalty Interest (ORRI), Non-Participating Royalty Interest (NPRI), and more. Understanding these distinctions is crucial for anyone involved in the oil and gas sector, whether you’re negotiating contracts, managing assets, or planning new explorations.
Mineral Interest
This interest pertains to the ownership of the underground minerals (such as oil and gas) beneath a tract of land. Owners of mineral interests have the right to lease, sell, or participate in the development of these minerals.
Royalty interest
A royalty interest is a share of the gross production from a well, usually expressed as a percentage. This percentage is known as the Decimal of Interest or DOI. Royalty interest owners receive a portion of the revenue generated from the sale of oil and gas, but they are not responsible for the operational costs associated with drilling, extraction, and production.
A Non-Participating Royalty Interest (NPRI) is a specific type of royalty interest in the oil and gas industry. It grants the holder the right to receive a fraction of the production revenue from the minerals extracted but does not confer any rights to participate in leasing or operational decisions regarding the mineral property. An NPRI is categorized under Royalty Interests because it is purely revenue-oriented and does not involve participating in the operational or leasing aspects of the mineral estate. However, it is distinct from other royalty interests because of its non-participatory nature, which limits the holder’s involvement beyond receiving revenue shares.
Working interest
Working interest represents both the right to a share of production and a financial responsibility for a proportionate share of the operating costs. Working interest owners have a more involved role, contributing to operational expenses but also reaping a proportionate share of the profits. The well operator divides funds among those with working interests after operating expenses have been covered. Often times this interest type is referred to as a “non-op working interest”.
Overriding Royalty Interest (ORRI):
This is similar to royalty interest but is carved out from the working interest. It does not affect the mineral ownership but grants a share of production revenue. Overriding royalties typically expire once the lease has produced or at the end of the lease term.
Net Profits Interest
An interest that provides the holder a share of the net profits from the production of oil and gas, after certain costs are deducted. It is a non-operating interest, meaning the holder is not responsible for operating expenses.
Leasehold Interest
This interest is held by a lessee under an oil and gas lease. The lessee (often an exploration company) acquires the right to explore and develop the property for oil and gas production. This interest combines elements of working interest and mineral rights but is contingent on the terms of the lease.
Carried Interest
In this arrangement, one party (often a smaller partner) agrees to carry another partner through the exploration and/or development phase. The carrying partner covers the expenses, and in return, they receive a larger share of the profits or a reimbursement from the carried partner once production starts or reaches a profitable stage.
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The information provided by Valor in this blog is for general informational purposes only, not to provide specific recommendations or legal or tax-related advice. The blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
