Mineral Rights Ownership
You might be wondering:
“Do I own the mineral rights below the surface of my property?” and
“What is the difference between Surface Rights, Royalty Interest, and Mineral Rights ownership?”
This article will help you understand the key concepts and oil and gas mineral rights ownership types and the difference between Mineral Rights and Royalty Interests. To understand the difference between the two types, we first need to understand how minerals can be owned. Before we dive into the details, let’s define a few of the key terms.
What is Property?
Property can be described as “a thing that is owned or possessed”. In the case of mineral rights, it is important to understand what type of property we are talking about. Property can be classified as real or personal. Real property is the land and associated permanent fixtures, such as buildings or homes. Since oil and gas and other minerals are considered to be part of the land, they are considered a form of real property.
What is Ownership?
Ownership can be defined as the “right or state of possessing something.” In the case of real property, this represents the exclusive right to possess and use the property.
There are 4 Primary types of Types of Mineral Ownership
Fee Simple ownership represents the absolute ownership of all aspects of a property for an indefinite period of time. The fee owner owns both the surface and the mineral rights below ground. As such, fee simple owners have the rights to grant mineral or oil and gas leases.
In many states, mineral rights can be owned separately from the surface. This is called a “split estate.” This occurs when the original fee simple owner transfers ownership of only the subsurface minerals. When the minerals are severed or split from the surface rights, it is done using a deed to convey the subsurface minerals separate from the surface rights. The person who owns this mineral interest is called a “mineral owner.” In most cases, the mineral owner is still entitled to the use of the surface as reasonable and necessary for the recovery of the minerals. The mineral owner has rights to grant an oil and gas lease.
Surface owners only have the rights to the use of the surface land and associated permanent fixtures (e.g. buildings). The surface owner does not have the right to grant an oil and gas lease. This is also called the Surface Estate.
In oil and gas, a royalty owner has the right to receive a royalty or a share of production but does not have the right to explore for minerals, grant oil and gas leases, or receive the associated bonuses or rental payments. There are many types of royalty interests and they can be created through a conveyance or through a clause in a lease.
But you may also be wondering:
“What are the main types of Royalty Interests?”
There are two key types of Royalty Interest to understand:
Overriding Royalty Interest (ORRI)
An Overriding Royalty Interest or “Override” is a type of royalty interest that is created from the Working Interest but it is not responsible for the cost of production. It does not affect the royalty interest payable to the lessor (mineral owner). The limitations associated with an Overriding Royalty Interest are that it shares in the income from the production of oil and gas only as long as the associated lease is in effect. Once production stops and the lease expires, the Override also expires.
Non-Participating Royalty Interest (NPRI)
A Non-Participating Royalty Interest or NPRI is also an interest in the production of oil, gas, and other minerals but in this case, it is carved out of the mineral fee estate. It is a free royalty, meaning that the interest is free from the cost of production. Unlike the mineral owner, the NPRI owner does not have the right to negotiate or grant a lease or receive any associated rent or bonus payments.
As you can see, there are many types of ownership when it comes to oil and gas and other minerals. This article only scratches the surface and since property laws vary from state-to-state, it is important to consult with a qualified person before signing any agreement. In the meantime, if you’d like to learn more, we recommend checking out this video.
Use this Often-Ignored Technique to Get Cash today While maintaining control over Your Mineral Rights
There are many tools that mineral owners can use, such as the Non-Participating Royalty Interest if they are looking to sell a portion of their interest to generate a lump sum of cash or too simplify estate planning. In a future article we may go into more detail around assigning a Non-Participating Royalty Interest (NPRI). Post a comment if this would be helpful or if you have any other suggestions.
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