How Do I Calculate ORRI?
If you’re interested in investing in a mineral lease, there’s no better time to do it than today. With lower drilling activity and rising demand, the value of existing mineral rights is greater than ever before. One of the ways to in on the action is through overriding royalty interest or ORRI.
The future of mineral investments looks promising, and ORRI can be a viable way to profit off of new production.
In this article, we’ll discuss what ORRI is, how it works, and how to find its value.
What is ORRI?
An Overriding Royalty Interest (ORRI) is a fractional, unshared interest in a mineral lease that gives the interest owner rights to receive proportional revenue from the produced oil and gas sales. It’s best described as an interest in the oil and gas sale proceeds instead of the minerals themselves.
The ORRI is taken out from the well’s working interest (WI). It’s often given to the landmen and geologists as financial compensation.
The mineral owners let the subsurface rights to oil and gas companies via a WI lease, allowing them to drill, produce, and explore the mineral reserves. ORRI is carved out of the WI. In other words, oil and gas companies usually allow investors to lease ORRIs to fund their operations.
Similarly, lawyers, landmen, and geologists can invest in ORRIs as financial compensation for their work. Since an ORRI cannot be divided, it’s completely different from an RI or WI.
Factors That Impact ORRI Value
Before calculating the value of an ORRI, it’s crucial to consider these factors.
Working Interest (WI) Value
We know that the ORRI is simply a fraction of the WI, which is why the WI is a significant factor in determining the value of your ORRI. The owner of the WI sustains all the costs required for the development and exploration of the land lot. The WI party receives the revenues after any third parties leasing their share in the mineral right receive the revenue.
The lease terms also heavily influence the ORRI value. For instance, the lease term determines how long the ORRI will continue, as the life of ORRI is proportional with the duration of the lease.
Royalty Interest (RI) Value
More importantly, the owner of the Royalty Interest has the first and foremost right to the revenues from gas and oil sales. As an ORRI lease owner, the WI proceeds determine your proportional share after the RI owner receives their compensation. That compensation may be between 12.5% to 25% of the mineral reserves’ revenue.
Production Levels and Reserves
Certain wells have mass-producible reserves, allowing them to gather higher proceeds from their oil and gas sales. Today, more and more oil and gas companies aim to increase their producible reserve estimates and keep up with the improving technology.
ORRIs guarantee a share for their owner in the wells’ production, not the lease itself. As a result, the ORRI lease may expire when it’s no longer economical to produce these wells.
How to Calculate ORRI?
As mentioned earlier, the ORRI is carved out of the WI after deducting the royalty interest from it, with the remaining revenue known as the Net Revenue Interest (NRI). When leasing an ORRI, the NRI greatly influences the proportional share of the WI you’re hoping to receive..
For example, the RI holder will receive 25% of the monthly revenue from a $1 million oil and gas sale. That leaves the NRI with 75% of the monthly income, resulting in $750,000.
Suppose your ORRI is 5%, then, as the concerned third party, you will receive 5% of the NRI as their monthly financial compensation. That means you’ll receive $3,750 every month from the revenue of a $1 million oil and gas sale.
Here’s a complete formula to help you understand how to calculate your ORRI value quickly:
NRI = WI – RI
ORRI = 5% of NRI
Do Oil and Gas Prices Impact ORRI?
It’s pretty simple to calculate the value of an ORRI since it’s a small percentage of the WI and based on the well’s production quantity.
Here’s an example to help you understand how ORRI payments work:
Let’s consider that a person invests in a 100,000-acre land lot in an oil-producing mineral lease. The oil company offers the investor a 5% ORRI in exchange for any required services, such as geology reports or Preliminary Economic Assessments (PEA).
That means the geologist’s share makes up for 5% of the working interest in all produced sales from the land.
Of course, the prices of oil and gas produced from these wells also influence the revenue from WI production. If the prices decline while the oil company reports a higher production, the increase in funds can counterbalance any decreasing fossil fuel prices.
The WI owner will be responsible for all production costs. So if the costs are higher, the revenue would be smaller and result in a smaller ORRI payment.
The formula for calculating ORRI remains the same. However, the outcome depends heavily on the revenue made from the sale of the minerals. The higher the sale (whether because of volume or high commodity prices in the market) in a month or quarter, the higher the payment for the ORRI holder.
By understanding the meaning and value of an ORRI, you can look for investment opportunities in the oil and gas royalties. Still, you may need help determining when to invest in or sell your ORRI and which parcels or basins offer the highest upside.
It’s crucial to factor in the mineral rights’ past, current, and future values, along with those of surrounding tracts. You may consult a mineral rights contract specialist or broker to help determine the actual value of ORRI and when to monetize it for maximum profit.