Before investing time, money and resources into the extraction and development of oil and gas, the chief responsibility of those involved should be researching ownership of the land in question. Specifically, overall revenue generated from the production and refinement of natural resources is subject to a reduction, depending on the ownership of royalty interest.
What is Royalty Interest?
Royalty interest allows the owner to share in the success of natural resource production without incurring the associated costs. For oil and gas companies, royalty interest payments can significantly reduce total revenue gained while risk and liability remains unchanged. There are three types of royalty interest to consider.
- Landowner’s royalty – Belonging to the lessor, landowner’s royalty is the percentage paid to the landowner based on total revenue from natural resource production
- Overriding royalty – Held by an entity that doesn’t own mineral interest, overriding royalties can be given in exchange for leasehold interest.
- Nonparticipating royalty – Entities owning nonparticipating royalties cannot participate in bonus or rentals, but receive royalties on revenue generated from the production of natural resources.
Royalty Interest Offers Benefits for Owners
Though it almost seems unfair, royalty interest owners may receive the following benefits.
- Perpetual payments
- No liability to government
- No cost for production
- No liability for property damage
- No liability for subsurface damage
Implications for Oil & Gas Companies
Depending on the distribution of royalty interest, oil and gas companies may bear the burden of paying for all production costs while incurring maximum liability. Found in the royalty clause of an existing lease, the owners of royalty interest are entitled to their documented share of royalties before costs and expenses are calculated. Oil and gas companies facing the rising costs of doing business may experience a significant loss in revenue.
As a result, oil and gas companies need to research ownership documents in their entirety. With regard to royalty interest, it’s essential to look for the following.
- Length of royalty agreement – Not all royalty interest is perpetual. It can be limited by length as stipulated in the lease.
- Lease terms – When reviewing real property documents, special attention should be paid to the details of lease terms.
- Three or more owners – Thanks to nonparticipating and overriding royalty interest, a third party (or more) may be entitled to royalty payments. Depending on the total number of royalty owners, oil and gas companies may only receive a small fraction of the total production revenue.
Real Property Records are Essential
To avoid legal complications down the road, oil and gas companies should obtain real property records before moving forward with project plans. Regardless of your role in the extraction and refinement of oil and gas in Texas, online record searches streamline the acquisition of detailed real property documents.
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