Oil and Gas Interests: Part Two
We’ll continue our discussion of oil and gas interests in this post by going over working interest and overriding royalty interest. Let’s get started!
Our last post discussed mineral interest, royalty interest, and non-participating royalty interest. This post will focus on working interests and overriding royalty interests, which are typically owned by the oil and gas company. Before we get started, remember that a mineral interest owner will often lease their right to develop and produce the oil and gas underlying their land to an oil and gas company through an Oil and Gas Lease. When an Oil and Gas Lease is executed, the mineral interest owner retains a royalty interest, which is the ownership of a portion of the total production profits from a producing well. Although a royalty interest owner does not bear any operational costs to produce the oil and gas, royalty interest owners still own a portion of the revenue produced.
Working Interest
The interest leased to the oil and gas company through an Oil & Gas Lease is called the working interest. Working interest owners bear all drilling and production costs to produce the minerals. These production costs include all costs to explore, drill, maintain, and operate the well. Working interest owners also share in the production profits with the royalty interest owners. It’s only after the royalty payments are made to the royalty interest owners that the working interest owners receive their share of the production profits.
To further illustrate royalty interests and working interest, lets consider these interests in terms of a business operation. Every business has various expenses, such as marketing costs, rent, bills, and employee salaries. Every business also generates an income from the products or services that it sells. You can think of the working interest as covering all of the business’s expenses. The royalty interest gets a portion of the income, and the remaining income goes to the working interest.
Overriding Royalty Interest
As we can see from the example above, the oil and gas company is responsible for all production costs and shares in the production revenue, or income, with the royalty interest owner. The oil and gas company can “carve out” an overriding royalty interest from its share of production revenue in the working interest. An overriding royalty interest is entirely separate from mineral ownership, since it is an interest in the proceeds from the oil and gas sold. Similar to a royalty interest, an overriding royalty interest does not bear any production costs.
Overriding royalty interests are often conveyed to parties who helped in the drilling or development process of the minerals, like geologists, landmen, or brokers. When an overriding royalty interest is carved out of the working interest, the royalty interest owner will still receive its royalty payment first. The overriding royalty interest owner will receive its payment next, and then finally the oil and gas company holding the working interest will receive its payment on production from the producing minerals.
Have more questions? Check out our Frequently Asked Questions on our Mineral Rights page HERE or contact us HERE.