Mineral Interest vs Royalty Interest
In Texas, oil and gas is big business and Texas is a rich state for oil and gas production. About two-thirds of the 254 counties in Texas produce oil. In America – unlike in many other countries – landowners have full enjoyment of their property, including the minerals that exist below the surface. They can also sever the rights to the minerals below ground from the ownership rights over the surface.
According to Texas property law, two different forms of rights exist in real property – surface rights and mineral rights. Surface rights include any structure built above the surface and/or sub-surface structures that do not exceed a certain depth, as well as the right to use all surrounding structures on the surface property in accordance with state, federal, and local law. Mineral rights refer to the rights concerning mineral substances below a certain depth underground and how the minerals are preserved, explored, and/or extracted. These mineral substances can include natural gas, oil, or any other substance in common use today that can be mined or extracted from below the surface.
A quick overview of the differences between mineral rights and royalty interests shows a mineral interest is a real property interest obtained by severing the minerals from the surface and a royalty interest grants an owner a portion of the production revenue generated. We will discuss each in greater detail below.
What is a mineral interest?
A mineral interest is the real property interest created in oil and gas after the minerals are severed from the surface estate. Typically, a mineral interest is severed by a conveyance or a reservation. When a company or individual acquires a property’s mineral interest, the original owner can retain full control of the surface while a completely separate individual or company owns and manages the mineral rights. In separating the minerals from the surface, the mineral ownership takes on a life of its own with its own chain of titles separate and apart from the title governing surface land use.
A mineral interest is stronger than a surface interest. A mineral interest owner has the right to use the surface as needed to extract, develop, and/or explore the minerals beneath. This is why mineral interests are often called the “dominant estate.”
A mineral interest owner possesses executive rights to the minerals found on, in, or beneath the land, including reasonable surface use, the right to enter into a lease, and the right to drill or develop the minerals under the surface. A mineral interest owner also possesses the right to explore, develop, and get the minerals ready for production. Furthermore, they can receive lease bonuses, rental payments, shut-in payments, and royalties for the minerals found on the property. Shut-in payments are royalty interests paid to the lessor by oil companies to maintain a lease on presently unproductive mineral assets.
Anyone wishing to acquire mineral rights must know whether the rights are for an estate that is producing, non-producing, or leasing, as defined by the U.S. Mineral Exchange. Mineral interests are considered real property and are thus are subject to principles similar to real estate
Types of mineral interest ownership
While some may own the entirety of a mineral interest, an entity or individual can also own just a portion of it. When an owner possesses less than 100% of a mineral interest, they own what is called a fractional mineral interest. Other common types of mineral interest ownership include:
- Working interest: The owner of this type of mineral interest has the right to develop, produce, and/or explore minerals found beneath the surface – and pay for all of the associated costs. Working interest owners pay 100% of production costs and all of the expenses associated with drilling and extraction. Their portion of the proceeds is equal to the production revenue minus the royalties paid to mineral interest owners.
- Non-executive mineral interest (NEMI): Similar to a mineral interest but without the ability to enter into a lease, NEMI holders can earn lease payments and royalties.
What is a royalty interest?
A royalty interest is a property interest that entitles the owner to receive a share of the production revenue. An individual or company that owns a royalty interest does not have to pay for any of the operational costs required to produce the resource, but they still own a portion of the revenue produced. A royalty interest exists as long as the company leases the land and continues drilling. Once the drilling stops, the interest is gone.
When someone has a royalty interest in oil or gas, they own a part of a resource or have a right to some of the revenue the resource produces. A royalty interest involves an investor being the owner of oil and gas royalty rights and earning royalty payments. Since the minerals are extracted from the leased property, the owner receives a portion of the income generated. In other words, royalty interest owners retain some of the output of a property when a mineral interest owner enters a lease agreement. Unlike a mineral interest owner, however, a royalty interest owner does not possess executive rights.
There are three main types of royalty interests:
- Ownership interest: The most common type of royalty interest, an individual or business that holds an ownership interest owns the property as well as the rights to what’s beneath the surface.
- Non-participating royalty interest (NPRI): A non-cost bearing interest in oil and gas production where the holder doesn’t own the surface property but is still entitled to a share of the royalties resulting from subsurface production.
- Overriding royalty interest: Unlike mineral and royalty interests, an overriding royalty interest runs with a lease and not with the land. Therefore, they only remain in effect for as long as a lease is in effect and they expire when a lease expires. An overriding royalty interest involves a royalty above the royalties paid to the owners via an oil and gas lease and its payment does not affect the owners’ interest.
A royalty interest owner receives their share of production revenue before working interest owners.
Texas Oil and Gas Lawyers
If you have a legal question about oil, gas, or other mineral interest laws in Texas – or about royalty interest or royalty payments, then contact Lovell, Lovell, Isern & Farabough. Partner Brian W. Farabough is one of only a small number of Texas lawyers to be Board Certified in Oil, Gas, and Mineral Law by the Texas Board of Legal Specialization. Our experienced oil and gas attorneys have handled a variety of royalty and mineral rights cases across Texas. When you hire our firm, we will use every available resource to find and secure the most favorable possible outcome. Our business litigation lawyers also have extensive experience resolving mineral rights disputes. Our team is available to provide experienced legal counsel in all of the various aspects of Texas mineral rights law.