What’s the Difference Between Mineral Rights, Royalties, and Royalty Rights?
The low-risk steady returns in energy investments are attracting more institutional, private, and private investors. However, many new investors can get confused by the terminology associated with mineral rights. Terms like mineral interest, royalties, and royalty rights seem to mean the same or overlap to some people. If you are planning to invest in this sector, it is essential to know the difference.
- Have a good understanding of these three important elements of mineral rights investing
- Be able to identify the relationships between mineral rights, royalties, and royalty rights
- Be able to apply this knowledge to improve your investment activity
What are Mineral Rights?
When you own the mineral rights to a property, you have complete control over the destiny of minerals discovered in or underneath the land. As a result, your mineral rights give you the executive power to excavate, transport, or enter into a contract with an operator for mineral production. Also, you can legally receive royalties, leasing bonuses, and rental payments for the minerals on the property.
In several states, properties often have an arrangement where one person owns the surface rights, and the other owns mineral rights. This arrangement is possible because these states allow individuals or companies to buy the property’s mineral interest from a fee simple owner, thereby severing the ownership into surface rights and mineral rights. Also, because of fractionalization, the mineral rights can have multiple owners.
To make mineral rights ownership more viable, some mineral-rich states like Texas and Oklahoma give the mineral estate more rights than the surface estate. These mineral dominant states provide the mineral rights owners more leverage to use the land for mineral excavation and extraction. Otherwise, their mineral interest would not be worth much.
What are Royalties?
Mineral owners receive royalties from the operators as compensation for their share of all production of minerals on the property. During lease negotiations, the two parties define and record the terms of the royalty payment. Usually, the percentage of royalties ranges between 12.5% to 25%. In addition, the mineral owner has the right to receive delay rental payments, lease bonuses, and shut-in payments.
Royalty payments depend on the drilling activity of the company leasing the lands. When it stops, the royalty payments disappear, and the mineral rights owner can sell the lease to another company or exercise other options.
What are Royalty Rights?
One of the options available to the mineral rights owners is to sell part or all of the royalty interest. Since the owners can sever the royalty interest from the mineral rights, they can sell them without losing executive rights and mineral interest. Also, the mineral rights owners keep the right to lease bonuses, shut-in payments, and lease bonuses.
As the royalty rights owner, you would get the right to a percentage of the royalties on oil and gas production from the property without bearing any of the operational cost of production. However, you would not have the right to lease the mineral interest or share in any bonus payments for granting a lease.
Royalty rights are available in three types. Each type has its independent set of rights. Here is a breakdown of each one.
Probably the most common type of royalty interest is ownership interest. By definition, this kind of royalty interest belongs to the owner of the property and the land beneath it. So, before a company can drill and extract any oil or gas from the ground, it would have to secure a leasing contract from the mineral rights owner before any operations could proceed.
Most commonly, an oil and gas company will offer a royalty payment package that includes a sign-on bonus. The lease rate mainly depends on market conditions at the time and the company’s risk-reward analysis.
Non-Participating Royalty Interest (NPRI)
Just as a landowner can sell their property and keep the mineral rights, the owner can sell the mineral interest and keep all or part of the royalty rights. The name of this type of interest is non-participating royalty interest (NPRI), meaning the owner of this royalty right is not involved in lease negotiations, lease bonuses, or rental payments.
Also, a mineral rights owner may need to raise some cash by selling a percentage of royalty interest with an NPRI. For a lump sum of money, you could receive a portion of the royalties on production based on the conditions in the lease.
Usually created before the lease, NPRI originates from a conveyance or reservation in a particular parcel of land. But, It is only active during oil or gas production on the property.
Overriding Royalty Interests (ORRI)
An ORRI is a carved-out portion of the royalty separate from the royalty rights owner’s cut. Instead, it comes out of the oil and gas companies’ share of the production. For example, if a landman sold your lease to an operator for 17.5% with a 1.2% reserve, the oil company would pay you 17.5% and pay the landman 1.2% ORRI as a form of commission. Sometimes, landmen and geologists use ORRI’s as a form of payment.
ORRI’s are valid until the lease expires or the operator ceases production. Also, just as any other type of royalty interest, people can receive it through conveyance or grants.
Mineral Rights, Royalties, Royal Rights, and Your Investments
Mineral rights-related investing has some complex options. But, as a result, it provides a wide variety of entry points with potential for steady income or growth for your investment portfolio. So, getting more familiar with the terms of this energy market can be very beneficial to your investment strategy and your bottom line.
Also, you can reduce your risks and increase your returns in energy by partnering with Eckard’s Enterprises. They have 35 years of vetting mineral rights offerings and helping investors learn how to buy mineral rights. Contact Eckard to learn more.