An overriding royalty interest is a type of royalty interest payment that is very common in the oil and gas industry. In this article, we will explain what an overriding royalty interest is, how it is different from a traditional royalty interest, and how to determine the value of an overriding royalty interest for oil and gas mineral rights.
What is an Overriding Royalty Interest?
An overriding royalty interest definition is the percentage share or derived value of an oil or gas production paid by the working interest owner or lessee. Overriding royalty interests are often referred to as an “ORRI” or simply an “override.”
Overriding royalty interests are usually set aside for geologists, brokers, or other entities that aide in the production of oil and gas, or were able to reserve an interest in the property by raising capital. Oftentimes, previous owners of mineral rights may own an overriding royalty interest as well, as a way to profit from future production of their former mineral rights.
Overriding Royalty Interests vs. Traditional Royalty Interest
Overriding royalty interests differ from traditional mineral rights royalties in a few different ways. The most important difference is that overriding royalty interests produce payments strictly from the sale of oil and gas, rather than the property itself.
In a traditional royalty interest, the mineral rights or royalty owner will receive royalty interest payments from the production of oil and gas, because they are the owners or partial owners of the mineral rights. In an overriding royalty interest, the owner of the override does not own the mineral rights, and the ORRI will expire whenever the oil and gas lease ends.
What Determines the Value of Overriding Royalty Interest?
ORRI’s are largely subject to an individual case to case basis, as the owners of the oil and gas lease sacrifice their production profits in exchange for services or capital to help a successful mineral extraction. Overrides cannot be sold to another entity after the oil and gas lease is over, as any ORRI is created on the finite term of the production process.