Types of Mineral Rights
Rights and obligations of the four most common mineral rights
Mineral Rights Overview
In most countries, oil and gas minerals are owned by the government, but in the United States, private citizens own a majority of the minerals. Minerals can be severed from the surface, creating two different chains of title or ownership, which is further complicated by the varying types of mineral rights.
There are 6 types of mineral rights – each with unique advantages, restrictions, and risks. Mineral rights may be acquired by inheritance, purchase, or court order.
We’ll explore each of these briefly and then look the four most common mineral rights in greater detail.
There are 6 types of mineral rights – each with unique advantages, restrictions, and risks. Mineral rights may be acquired by inheritance, purchase, or court order.
We’ll explore each of these briefly and then look the four most common mineral rights in greater detail.
Six Types of Mineral Rights
Fun fact: Working Interest is the only mineral right with an obligation to pay expenses related to drilling and operating a well.
Mineral Interest
Executive Rights to Explore, Develop and Produce the Minerals
Mineral interest owners have the executive rights to explore, develop and produce the minerals in, on or under a specific tract of land. Mineral interest owners are entitled to receive a lease bonus, delay rentals, and royalty revenue.
Background:
The owner of a fee-simple estate owns both the surface and the minerals. If the minerals are conveyed to another person or entity, they are “severed” from the land and a separate chain of title begins.
When a person owns less than 100% of the minerals, they are said to own a fractional or undivided mineral interest.
If Sam dies and leaves his mineral interest to his two children, John and Sarah they each inherit 50% of the mineral interest. Let’s say 30 years go by and John passes away, leaving his share to his two children, Liz and Jane. Now Sarah owns 50% of the minerals while Liz and Jane each own 25%. It’s easy to see how quickly a mineral estate can become split with dozens (or even hundreds) of owners in just a few generations.
Non-Executive Mineral Interest (NEMI) is similar to mineral interest but the owner does not have the right to execute an oil and gas lease. Often, the surface owner retains the executive rights (and fiduciary duties to the non-executive mineral owner).
Background:
The owner of a fee-simple estate owns both the surface and the minerals. If the minerals are conveyed to another person or entity, they are “severed” from the land and a separate chain of title begins.
When a person owns less than 100% of the minerals, they are said to own a fractional or undivided mineral interest.
If Sam dies and leaves his mineral interest to his two children, John and Sarah they each inherit 50% of the mineral interest. Let’s say 30 years go by and John passes away, leaving his share to his two children, Liz and Jane. Now Sarah owns 50% of the minerals while Liz and Jane each own 25%. It’s easy to see how quickly a mineral estate can become split with dozens (or even hundreds) of owners in just a few generations.
Non-Executive Mineral Interest (NEMI) is similar to mineral interest but the owner does not have the right to execute an oil and gas lease. Often, the surface owner retains the executive rights (and fiduciary duties to the non-executive mineral owner).
Mineral Interest Rights:
Which is dominant, minerals or surface?
Believe it or not, the mineral estate is dominant over the surface, giving the mineral owner the right to enter the property and use as much of the surface as is reasonably necessary in order to efficiently remove the minerals.
Believe it or not, the mineral estate is dominant over the surface, giving the mineral owner the right to enter the property and use as much of the surface as is reasonably necessary in order to efficiently remove the minerals.
Royalty Interest (RI)
When a mineral interest owner signs an oil and gas lease, they are leasing their mineral interest to a company that plans to drill one or more wells.
By signing an oil and gas lease, the mineral owner acquires royalty interest (RI) and is entitled to a percentage of the revenue generated by the well(s) without having to pay any of the expenses associated with drilling or operations.
Oil and gas royalty interest is expressed as a fraction (e.g. 1/4 of production) or percentage (e.g. 25% of production).
Some leases have a depth clause, so it also possible to have multiple oil and gas leases for a single tract of land.
When the oil or gas well(s) stop producing, the lease is released and the mineral interest owner is free to lease to another company.
By signing an oil and gas lease, the mineral owner acquires royalty interest (RI) and is entitled to a percentage of the revenue generated by the well(s) without having to pay any of the expenses associated with drilling or operations.
Oil and gas royalty interest is expressed as a fraction (e.g. 1/4 of production) or percentage (e.g. 25% of production).
Some leases have a depth clause, so it also possible to have multiple oil and gas leases for a single tract of land.
When the oil or gas well(s) stop producing, the lease is released and the mineral interest owner is free to lease to another company.
Royalty Interest Rights:
- Receive royalties on the well production (free of the cost of production)
Royalty Interest Holders:
- do NOT have the right to surface usage.
- do NOT contribute toward the cost of drilling or operating the well(s).
- do NOT have the right to sign an oil and gas lease.
Some mineral owners choose to sell your all or part of their royalty interest, keeping the mineral interest and executive rights in their family.
Overriding Royalty Interest
Similar to royalty interest, an overriding royalty interest (ORRI) is the right to a portion of production, free of the costs of production. It is carved out of the working interest (WI) of the well and usual conveyed to geologists, landmen, and other professionals as compensation.
ORRI Interest Rights:
Working Interest
Working interest (WI) is granted by an oil and gas lease between the mineral interest owner and the company that will drill and operate the well. The oil and gas lease gives the working interest owner the rights to explore, develop and produce the minerals beneath the land. Because the working interest holder is responsible for all expenses, they usually hold a large percentage of the royalties (upward of 75% or more).
Working Interest Rights:
Royalty Interest Obligations:
Mineral Right Entitlements
Quickly view the benefits and responsibilities associated with each type of mineral right.
| MINERAL INTEREST (MI) | ROYALTY INTEREST (RI) | NON-PARTICIPATING ROYALTY INTEREST (NPRI) | OVERRIDING ROYALTY INTEREST (ORRI) | WORKING INTEREST (WI) | NON-OPERATING WORKING INTEREST | |
|---|---|---|---|---|---|---|
| OWNS THE SURFACE OF THE LAND | NO | NO | NO | NO | NO | NO |
| OWNS THE MINERALS UNDER THE SURFACE | YES | YES | NO | NO | NO | NO |
| HAS THE RIGHT TO EXECUTE EXPLORE DEVELOP AND PRODUCE MINERALS UNDER THE SURFACE | YES | NO | NO | NO | NO | NO |
| HAS THE RIGHT TO EXECUTE AN OIL AND GAS LEASE | YES | YES | YES | YES | YES | YES |
| RECEIVES LEASE BONUS PAYMENTS | YES | NO | NO | NO | NO | NO |
| RECEIVES LEASE DELAY RENTAL PAYMENTS | YES | NO | NO | NO | NO | NO |
| RECEIVES REVENUE FROM WELL PRODUCTION | YES | NO | NO | NO | NO | NO |
| RIGHTS ARE RETAINED AFTER A LEASE EXPIRES | YES | NO | NO | NO | NO | NO |
| PAYS EXPENSES RELATED TO EXPLORATION, DRILLING, DEVELOPMENT AND OPERATIONS OF A WELL | NO | NO | NO | NO | YES | YES |
| RECEIVES TAX ADVANTAGES | NO | NO | NO | NO | YES | NO |