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Mineral Rights / Royalties PDF Print E-mail

The owner of a mineral interest actually owns the minerals under the ground and also has the exclusive right to produce them, or sell them, or even give them away if desired. Since the mineral owner actually owns the minerals, he or she can produce the minerals by drilling a well; or can give someone else (an oil company for instance) permission to drill a well for them. The oil company then promises them a share of any production, in the form of a "lessor's royalty." This royalty is spelled out using an oil and gas lease that the mineral owner and the company sign.


A common royalty given to mineral owners by oil companies is 3/16th's of the production. The oil company keeps the other 13/16th's for their part in drilling and producing the well, and bearing all the costs of doing so.

There are also OTHER types of royalty interests that are given to people by oil companies. One is called an overriding royalty interest, which is possibly the type of interest you had and "lost." This type of royalty interest is carved out of the oil company's 13/16th's interest and is often given to geologists, landmen and others who help the company get the well drilled. Since an overriding royalty interest is carved out of the oil company’s interest, it ends when the lease from which it was taken terminates. The oil company cannot convey ownership in minerals they do not own.

The 3/16th's lessor's royalty in the lease also ceases to exist when production stops, BUT the lessor still owns the minerals left in the ground (if any) after the well ceases to produce, and can lease them again in the future to another company (or the same company) and receive another lessor’s royalty. The mineral owner could also decide simply to drill a well himself, without the help of an oil company. The owner of an overriding royalty on the other hand, can not do these things, since their royalty interest does not come from actual ownership of the minerals, but was rather a payment for services. It is possible that one of your relatives was given an overriding royalty interest in the past by an oil company. This interest would have terminated when the lease from which it was taken terminated, since they did not actually own the minerals.

There is also something called a non-participating royalty, which is taken out of the mineral owner's interest, rather than the oil company's interest. It gives the holder the right to a stated share of production (if any) from the land. Some mineral owners will sell their mineral rights but retain the non-participating royalties. They may also only retain them for a specific term...say 25 years and as long thereafter as there is production, after which time they expire. It is also possible this is the type of royalty interest you "lost," simply because it expired.

It is confusing, and many minerals owners also refer to themselves as royalty owners since they do in fact get a royalty when a well is drilled. Their royalty however is not the same kind of royalty given to a geologist etc. by the oil company when drilling a well. In fact, sometimes people convey "royalties" (a right to a share of production) in a deed, when in fact they meant to convey "minerals" (actual ownership of the minerals.) Often a court must decide what the actual intent of the parties was.

Definitions:

Assignment: The legal instrument whereby oil and gas leases or overriding royalty interests are assigned or conveyed.

Assignor: The person conveying oil and gas leases or overriding royalty in an assignment.

Assignee: The person to whom oil and gas leases or overriding royalties are assigned.

Bonus: Cash consideration paid to a land owner or mineral owner on the execution of an oil, gas and mineral lease.

Delay Rental: Yearly payments paid during primary term to Lessor to delay drilling.

Depository Bank: A bank designated in an oil, gas and mineral lease to receive and distribute delay rentals.

Division Order: A schedule of owners and their decimal share in revenues of the well derived from the sale of oil or gas.

Grantor: A person who grants or conveys lands, minerals, etc..

Grantee: The person receiving lands, minerals, etc...

Gross Working Interest: See working interest.

Joint Operating Agreement: An agreement among joint interest owners describing how a well is to be operated.

Land Man: The person who secures leases and handles damages for oil companies who are drilling new wells or laying pipelines.

Landowner: The person who generally owns all or part of the minerals under his land and is entitled to lease the same.

Lease: Another term for oil, gas and mineral lease.

Lessor: The party who grants an oil, gas and mineral lease.

Lessee: The purchaser of an oil, gas and mineral lease.

Mineral Rights: The ownership of the minerals and/or hydrocarbons under a given surface, and the right to enter thereon to drill, and remove them.

Net Working Interest: Share in well proceeds attributable to net working interest.