Mineral Interest Vs Royalty Interest - What Are The Main Differences You Need to Know

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1. Mineral Interest vs Royalty Interest – What Do You Need to Know?

2. What is the difference between mineral and royalty interests in simple words?

Mineral Interest vs Royalty Interest – What Do You Need to Know?

The importance of understanding the difference between mineral interest and royalty interest cannot be ignored. After all, the type of mineral interest ownership governs how mineral owners can make money from their mineral interests.

It is worth pointing out that having minerals on your land might not grant you the right to access those resources. This is where mineral rights come in.

While the governments of many countries control the rights to mineral resources, the United States grants private individuals ownership over these rights. For this reason, landowners can enjoy the full benefits of their properties, including the minerals beneath the land’s surface.

Besides this, when considering a property’s mineral interest profile, it is possible to separate mineral rights from ownership rights over everything above the surface of the ground, which are regarded as surface rights. The mineral substances discovered beneath the land may include oil, natural gas, copper, and more.

This comprehensive guide will explain more and provide insight into the difference between a mineral interest and royalty interest.

What is the difference between mineral and royalty interests in simple words?

In simple terms, a mineral interest refers to a real property interest, which can be received when minerals are severed from a land’s surface. On the other hand, royalty interests ensure that their holders enjoy a fraction of the generated production revenue.

Take, for instance, a landowner who has a mineral interest in the resources beneath their land surface and can exploit these minerals anyhow they see fit. This includes exploration, mining, and making use of these resources.

In contrast, a landowner with a royalty interest granted via a lease agreement with an oil and gas company to exploit the resources – covered by the rights – does not. But they are entitled to receive royalties over a stipulated time, representing a portion of any revenue the company generates from the resources. There is also the potential to receive additional lease bonuses. After the period is reached, the mineral owner assumes control of the mineral rights again.

What is a Mineral Interest?

A mineral interest grants its holder the right to explore and exploit subsurface minerals. A mineral interest can be severed from surface rights by a reservation or a conveyance. When this happens, the entity that acquires the mineral interest may have complete control of the subsurface resources, even though the right over everything above the land belongs to another individual.

In addition, the severance ensures that the mineral ownership becomes distinct with a unique chain of title, which is different from any title that controls land use. Typically, a surface interest is not as strong as a mineral interest.

After all, a mineral interest holder needs no permission from a surface interest owner to access the land for the resources it has. For this reason, the term “dominant estate” can be used to describe mineral interests.

Companies or individuals can own a share of this interest. As a result, an owner might not have total control over these interests. When this happens, they only possess a fraction of the mineral rights. This can also be inherited from family members and, in the process, can result in owning a fractional mineral interest.

The rights of a mineral interest owner

Right to reasonable surface use to explore the property for minerals (including oil and gas)
Right to develop, extract, produce, use or dispose of minerals from the land
Right to sell or lease mineral interests in their entirety or as fractional interests
Right to pursue legal action against any party that interferes with their mineral interests
Right to a proportionate share of profits derived from the sale of minerals produced on the land
Right to claim compensation for any damage resulting from exploration or exploitation activities done to their lands.
Right to be informed about proposed developments that may affect them.

What are the different types of mineral interests?

Mineral interests come in two different types, which are explained as follows:

Executive Right:

This involves the right to implement or grant a lease to gas/oil companies, which covers the mineral estate. This implies that the owner can execute any action that can impact the exploration, exploitation, and development of a mineral estate.

Non-Executive Mineral Interest:

This involves giving up the capacity for leasing an interest. However, the owner of a non-executive mineral interest can still retain the right to be paid a royalty for the mineral interest lease.

What is Royalty Interest?

A property interest involves a non-participating royalty interest, which ensures that an owner is entitled to a share of the revenue generated from production. A royalty-interest owner does not incur any operational costs related to the development and production of the resources.

Yet, non-participating royalty interest owners retain a fraction of the generated revenue. As long as the interested gas/oil company keeps drilling, the royalty interest will continue. However, the interest stops when the drilling stops.

An owner of a royalty interest in oil and gas can own a portion of the resources produced. For many, this is a good source of income since a royalty-interest owner earns royalty payments without any need to share the production costs with oil and gas companies. This is the main difference from working interest owners who must share the production costs.

By entering oil and gas leases with an interested entity, the owner can enjoy a fraction of generated income during the lease term. However, unlike a mineral interest owner, someone holding a royalty interest does not control executive rights.

For instance, an owner can enter an oil and gas lease with interested gas/oil companies. In the contract, the length of the lease period, and the number of royalties, will be agreed on. For example, the cost of producing or developing the minerals is $500,000. But a royalty-interest owner will not incur any of these costs. The gas/oil companies drilling and extracting the minerals will bear these costs.

However, the royalty interest holder is entitled to be paid a fraction of the revenue from mineral production. Royalty payments will only stop when drilling stops or when the lease expires.

A royalty interest owner

Has no executive rights
Cannot delay rental payments
Has the right to receive a specified share of production proceeds from the extraction of minerals
Can enforce the terms of the mineral agreement
May sue for damages if the contract is breached by another party
Has the right to participate in negotiations over mineral leases or sales agreements
Can request access and disclosure of information related to mining activities

Types of Royalty Interest Ownership

There are three types of royalty interests. These are introduced below:

Ownership interest

This represents the most common type of royalty interest. The owner of this interest will have rights to everything beneath the surface. This includes the minerals, gas, and oil extracted from the land. The owner also has the right to receive a portion of any profits from these resources.

Non-participating royalty interest (NPRI)

This is a non-cost-bearing interest in oil and gas production, which involves the holder not controlling the surface property. However, they still own a portion of the royalties that result from subsurface production.

Overriding royalty interest (ORRI)

This type of royalty interest typically runs with the land. But overriding royalty interests usually expire when the end of the lease term has been reached. The payment of an overriding royalty interest has no impact on the owner’s interest.

If you are an interest owner, it is only natural to wonder what you can do with your rights. You can sell your rights or enter a lease agreement with an interested company and receive royalty payments. You can also participate in developing subsurface resources and become a working interest owner.

Conclusion

In producing appliances and accessories that have made life easier for humankind, mineral, oil, and gas resources are crucial. For this reason, stumbling on these precious minerals can be profitable.

However, being the rightful owner of your property does not imply that you can access the minerals contained beneath the surface. This is why it’s essential to understand a mineral interest vs. royalty interest in the oil/gas sector.

With a mineral interest, you can explore and develop subsurface mineral resources. These interests can be sold or leased for profit. This guide has already explained what mineral rights vs royalties cover, as well as their different types and outlined the rights mineral or royalty interest owners can hold.

To know how a mineral interest you have or wish to purchase works, and its potential benefits, hire an attorney or contact a mineral rights expert like Pheasant Energy.

Mineral Interest Vs Royalty Interest – What Are The Main Differences You Need to Know

Mineral Interest vs Royalty Interest – What Do You Need to Know?

What is the difference between mineral and royalty interests in simple words?