Types of Mineral Interests and Royalties

Mineral resources are essential to our modern industrial society, and they are used everywhere. We need them to make automobiles, computers, domestic appliances, asphalt roads, homes, machinery, fertilizer, precious metals in jewelry, and much more. Also, it has been proposed that biominerals could be essential indicators of extraterrestrial life. As a result, minerals could play a vital role in searching for past or present life on other planets.

What Are Mineral Interests?

The term ‘mineral interests’ refers to the ownership of mineral rights which allow exploration, exploitation, and mineral production activities in a given area. An individual can procure mineral rights associated with a property, and in this case, can sever the surface rights from the mineral rights.

Doing so allows, for example, landmen or other representatives of oil, gas, coal, or energy companies to acquire the mineral rights. The landowner retains authority over the surface area of the tracts of land in question.

Individuals or companies can also own shares of any type of interest. Also, whenever an owner does not have full control, they possess just fractional mineral rights. Anyone who inherits these types of mineral rights from their family members might also eventually own a fractional interest. However, an owner reserves the right not only to receive lease bonuses but also to delay rental payments, shut-in payments, and any royalty payment due to a royalty owner for their share of royalty interests.

Furthermore, it is worth noting that mineral rights are more valuable than surface rights. In some countries, including the United States, both terms are different. Usually, someone with the former attached to their property has the right to use the surface as required to explore, develop, or exploit the minerals that lie beneath.

Non-Producing vs. Leased vs. Producing Mineral Interest

Anyone wishing to acquire mineral ownership must know whether they are producing, non-producing, or leasing rights, as defined by the U.S. Mineral Exchange. You must be armed with the right details, as explained below:

Non-Producing

• These are mineral rights without any associated cash flow.
• In many cases, the profit potential might not support the costs of production. Usually, any valuation for non-producing mineral rights depends on a price multiplier per net acre.
• Certain factors determine the net acre value of such mineral interests. These include the distance from producing wells, production history, oil prices, and more.
• These factors are due to the constant changes that occur in the market.
• For example, multiple horizontal wells are located in sections of Reeves County in the Permian Basin.

Leased

• This type of mineral interest covers fluid minerals below the surface and oil or gas or geothermal resources.
• It also involves a contract that exists between a mineral owner – otherwise called the lessor or holder of the royalty interest – and a working interest owner – the lessee – in which the lessor grants the working interest owner (the lessee) access to explore, exploit, and produce oil, gas, and other related minerals for a particular period according to the lease terms.
• An oil or gas lease normally results in royalty payments that are made to the rightful royalty owners.
• Mineral rights owners might demand that a business (say an oil company) reduce the level of light and noise pollution that accompanies the extraction of the minerals.
• Usually, leases are term-dependent. This implies that the company has a specific period to work on the resources. If not, the company risks forfeiting its right to carry out extraction. A mineral rights owner (e.g., an energy company ) with certified ownership rights might have the right to specific minerals found in a property even though the said property belongs to another landowner.

Producing

• This mineral interest involves minerals that are presently under production or being extracted from the land’s subsurface, and as a result, generating monthly revenue.
• Generally, it is highly valued by royalty owners.
• Often, there are more than one or two active oil and gas wells associated with producing minerals.
• Royalty payments are paid to landowners (or another royalty interest owner) on the proceeds gathered from the sale of minerals contained in their land.
• For example, the older oilfields located in the Texas Panhandle and New Mexico contain producing minerals, many of which have been exploited.

What are the different types of mineral interests?

As explained above, the essence of mineral rights ownership is to possess the right to explore, exploit, and use as much of the surface as required to extract minerals. As a result, there are several types of mineral interests, some of which are introduced below:

Mineral Interest

This simply involves the provision of mineral interest ownership under the ground. A mineral interest owner can obtain royalty, lease, and shut-in payments. Shut-in payments are royalty interest paid to the lessor by oil companies to maintain a lease on presently unproductive mineral assets. Furthermore, they are known to find their applications in the oil and gas industry.

Non-Executive rights

This involves the ceding of the right or capacity for leasing an interest. The owner of non-executive mineral interest still retains their right to any royalty paid concerning the mineral interest lease in question.

Some entities to an oil and gas conveyance may find it easy to agree to bestow the executive rights on a party rather than other parties for a variety of reasons. For instance, a landowner grantor may transfer the surface ownership but retain an undivided one-half interest.

Executive Rights

These are the mineral rights an entity possesses to authorize oil and gas leases. In other words, it is the right to implement every action that affects the mineral exploration, exploitation, and development of a mineral estate.

Furthermore, these rights are needed to execute geophysical exploration, mining operations, and production of oil and gas. This implies that, although an owner may hold mineral interests or mineral deeds, if they do not have the executive rights, then it will prove herculean to carry out any form of extraction on the property.

Royalty Interests

A royalty interest involves an investor being the owner of oil and gas royalty rights and earning royalty payments on rights investment. Since the minerals are extracted from the leased property, the owner receives a portion of the income generated by the E&P company.

In other words, royalty interest owners retain some of the output of a property when a mineral owner enters a lease agreement.

Overriding Royalty Interest (ORRI)

An overriding royalty interest involves a royalty above the royalty provided to the owners in an oil and gas lease. This does not affect the owners. For example, a geologist or a landowner may be given a 1% overriding royalty interest by the operator in exchange for subsurface analysis or title work.

Non-Participating Royalty Interest (NPRI)

A non-participating royalty interest, which bears similarities to a regular royalty interest, does not bear any cost related to a drilling unit or operating a well. Yet, the interest owner does not possess the right to make certain decisions, including leasing, and many times, they do not receive lease bonuses.

In other words, non-participating royalty interest owners are usually not responsible for the exploration, development, and production costs.

There is often a generation of these mineral rights when mineral owners wish to sustain their ability to make decisions related to their rights and royalty interests while leveraging a fraction of the interest in negotiations.

Working Interest

A working interest is a type of ownership where both costs and revenue are shared based on the percentage of ownership. Costs include drilling, prepping the well for production (completion), and ongoing operating expenses. Sometimes, the share of the costs exceeds the share of the revenue for working interest owners. This is due to the need to pay royalty interests that do not bear the drilling and operating costs.

Non-Operated Working Interest

A non-operated working interest involves an owner who holds an interest in a gas or oil well or other mineral extraction enterprise but does not engage in or have any responsibility for the actual operation of the well or mine. Interest owners with a non-operating working interest are usually insured under the insurance coverages written on the operation.

Leased Interest

There are times when oil and gas companies prefer a lease agreement to mineral rights. Oftentimes, this situation or choice arises when there is any uncertainty about the extent of minerals or other resources present in the land. If the company finds appropriate material, extraction will occur. If not, officials will wait for the lease to expire, and then the rights revert to the property owner.

Net Proceeds

The net proceeds are simply what the seller receives from selling a mineral right after the deduction of expenses. The expenses incurred during the sale may be small or a significant deduction made from the gross proceeds. It is the net proceeds that are subject to capital gains tax.

Mineral Classification

For a substance to be classified as a mineral, it must exhibit the characteristics of a crystalline substance. Besides this, it must also be an inorganic, homogeneous, naturally occurring substance with a distinct chemical composition.

How do you calculate mineral interest?

It is not wrong for owners to be curious about the value of mineral interests. The best approach to estimate mineral rights value is via an existing offer. Different buyers will come with offers – some with a low value, while others will come with teaser offers, but subject to conditions.

For example, to calculate leased rights, where the owner does not receive royalty checks but has an active agreement, the rule of thumb is 2x to 3x the lease bonus. For example, if Peter owns 1/2 minerals in 80 acres, he owns 40 net mineral acres. He has leased his minerals at a specified royalty rate – say a 25% share. The royalty division of interest, which can also help estimate his royalty percentage share of the revenues from the unit and well, is given as 1/2 X 80 X 0.25 = 0.10000.

FAQs

• Are mineral interests considered real property?

Yes, they are. Mineral rights are subject to similar principles as real estate.

• What is the difference between a mineral interest and a royalty interest?

A mineral interest is simply a real property interest obtained from the severance or exploitation of minerals – say natural gas – from the surface. On the other hand, a royalty interest is the property interest that grants an owner a portion of the production revenue generated.

• What does an undivided mineral interest mean?

An undivided interest is one reserved by property owners resulting from creating an oil and gas lease.

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