Oil and Gas Interests: Putting It All Together

We’ve discussed the different kinds of oil and gas interests. It’s time to see how all of these interests work together. Read on to learn more!

In this post, we’ll be going over how mineral interests, royalty interests, non-participating royalty interests, working interests, and overriding royalty interests all work together. Click HERE and HERE for a review. We’ve included illustrations below so that you can better visualize each of these interests.

Let’s say that Mary owns all of the mineral interest underlying a tract of land. Through an Oil and Gas Lease, Mary leases her right to develop and produce these minerals to an oil and gas company called Western Producers, LLC. This Oil and Gas Lease states that Mary will receive a royalty equal to 1/8 of production. Western Producers, LLC drills a well within the primary term of the Oil and Gas Lease and begins producing oil and gas.

With this Oil and Gas Lease in place, Mary still owns all of the mineral interest in the land, minus the right to develop and produce the minerals, and a royalty interest. Her royalty interest is equal to 1/8 of the production revenue from the producing well. Western Producers, LLC owns all of the working interest, which includes all production costs and its portion of production revenue, or income. Ownership of the production revenue is shown below. The total ownership of the production revenue will always add up to 100%.

Mary wants her son Noah to share in the profits generated from the producing well, but she doesn’t want him to worry about negotiating an Oil and Gas Leases once this well stops producing. Instead of giving Noah a portion of her entire mineral interest, Mary decides to convey half of her rights to royalty payments to Noah in the form of a non-participating royalty interest. Ownership of the production revenue would now look like this:

Western Producers, LLC has agreed to compensate its broker, Owen, who helped negotiate the Oil and Gas Lease with Mary by using an overring royalty interest. Western Producers, LLC carves out an overriding royalty interest equal to 5% of the production revenue from the lease and conveys it to Noah. Total ownership of the production revenue now looks like this:

After 10 years, the well drilled stops producing oil and gas and is plugged, at which point the Oil and Gas Lease will expire. Without any production to generate revenue, all interests tied into the Oil and Gas Lease will expire. Mary and Noah will no longer receive payments from the royalty interest; and Western Producers, LLC and Owen will no longer receive payments from the working interest. The right to develop and produce the minerals will return entirely to Mary. The right to receive royalty payments from future producing Oil and Gas Leases is shared between Mary and Noah due to Mary’s conveyances of a non-participating royalty interest.