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. Moreover, how it is different from a traditional royalty interest. Then lastly, how to determine the value of an overriding 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. This is payable by the working interest owner or lessee. Overriding these interests is often referred to as an “ORRI” or simply an “override.”
ORRI is usually set aside for geologists, brokers, or other entities that aid in the production of oil and gas. These were able to reserve an interest in the property by raising capital. Oftentimes, previous owners of mineral rights may own an ORRI as well. This is as a way to profit from future production of their former mineral rights.
ORRI vs. Traditional Royalty Interest
ORRI differs from traditional mineral rights royalties in a few different ways. The most important difference is that ORRI produces payments strictly from the sale of oil and gas. This is rather than the property itself.
In a traditional royalty interest, the mineral rights or royalty owner will receive royalty interest payments. These are from the production of oil and gas. This is because they are the owners or partial owners of the mineral rights. In an ORRI, 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 an ORRI?
ORRI’s are largely subject to an individual case-to-case basis. The owners of the oil and gas lease sacrifice their production profits in exchange for services capital. This is to help a successful mineral extraction. Overrides are not sellable to another entity after the oil and gas lease is over. The creation of any ORRI is on the finite term of the production process.
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