Overriding Royalty Interest (ORRI)
Interest in the production from an oil or gas well, carved out of the working interest
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What is an Overriding Royalty Interest?
Overriding Royalty Interest is carved out of the working interest (WI) of the well and usual conveyed to geologists, landmen, and other oil and gas professionals as financial compensation.
Overriding Royalty interest is free from the cost of production. The owner does not invest in the drilling activities or sharing well operating expenses.
Overriding Royalty Interest (ORRI) agreements terminate when the oil and gas terminates. It is not an interest in the mineral, but rather a share of the production. When the well or wells become uneconomical, the lease is released, terminating both the royalty and overriding royalty interest.
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Calculating Overriding Royalty Interest
An ORRI is a straight percentage.
For example, a 2% override would appear on the royalty statement as 0.02 interest in the proceeds from the sale of the leased hydrocarbons.
The exact details of an override are dependent on the language. ORRIs can be interpreted literally or may have proportionate reduction language. It is always good to have an attorney review the ORRI language and the oil and gas lease.
Just like any other mineral right, ORRIs can be purchased or sold.
Overriding Royalty Interest Example
When XYZ Oil and Gas Company identifies a drilling location, negotiate leases with the mineral owners. In Texas, mineral owners typically receive 25% of the royalties (free of the cost of drilling and operating). The XYZ Oil and Gas Company receives 75% of the royalties in the form of Working Interest (WI) but also incurs the burden of paying for all expenses related to drilling and operating the wells.
Because drilling a well is very expensive, with most of the costs incurred before the well begins producing, operators often grant landmen, geologists, petroleum engineers, and other professionals an Overriding Royalty Interest in the lease. The override is usually a small percentage that is carved out of their 75% working interest.
Overriding Royalty Interest (ORRI) can be assigned at any time. A landman may agree to acquire leases for XYZ Oil and Gas Company in exchange for 50% cash and 50% ORRI (value = 0.05 ORRI) on future wells drilled on a specific tract (or tracts) of lands. However, the ORRI will not be of economic value until an economically producing well is drilled, at which point the landman will receive his or her share of the royalties. ORRIs may also contain proportionate reduction language.
A lot of ORRI's are sold in the first three months of production, before the well declines in value (and before anyone really knows how successful the well will be). This is a way for the landman to turn ORRI's into cash.
The same process is often used to compensate geologists, petroleum engineers, and other professionals.
How to Find Out Of You Inherited an ORRI
- Perform a title search.
- Hire a Landman.
First, locate the county office where deed records are kept. This is often the County Clerk or the County Courthouse. Some states have an office for the "Recorder of Deeds" or the "Register of Deeds".
Search Google for: [state] + deed records
What to search for
There are two main ways to search the deed records. The most obvious way is to enter your name (or the name of relatives who have passed away) into the grantor/grantee search box. The other is to search by legal description. You will need to follow the chain of title back to the land patent (when the land was first granted by the government).
You are looking for:
- Oil and Gas Leases
- Mineral Deeds
- Conveyance Documents
- ORRI Assignments
- Deeds (sometimes minerals are reserved or granted or a deed might reference a previous reservation)
If you want to perform a title search yourself, or you try but get stuck, you can hire a landman to search the records for you. Most landmen are highly skilled in running title, spending much of their careers searching for mineral owners for companies that want to extract oil and gas from a specific tract of land.
Overriding Royalty Interest (ORRI) Value
Minerals in the hottest shale plays are more valuable than those in older fields with conventional wells.
Producing minerals are worth more than non-producing minerals because they are generating revenue.
Highly productive wells (and off-set wells) can increase the value of your minerals.
Favorable lease terms (such as a 25% royalty) favorably impact the value of the leased minerals.
A small number of operators are unethical, and their reputation automatically devalues your minerals.
When oil and gas prices drop, revenue drops, and sometimes operators are unable to continue operations..
Why Sell?
Why People Sell Their Minerals Rights:
With the price of oil declining and operators practically giving gas away, I decided to sell before the bottom falls out.
I am on a fixed income, and the sale of these minerals will help me secure stable housing. My children will be okay if even if they don't inherit these minerals.
My oil wells have been producing for decades and the reserves are almost depleted. Once the wells are plugged, the value will be significantly lower. I'd rather cash out now.
I inherited mineral rights, but don't want to be involved with fracking and fossil fuels. I would prefer to support renewable energy and do my part to reverse climate change.