Difference between an ORRI & RI?

Hi guys!

I’m new on this forum & looking forward to the discussion :slight_smile:

Probably a silly question, but could someone please explain the difference between an override (ORRI) and a simple royalty interest (RI)? Am I correct in understanding that both are fully free of operating costs?

Thanks & Merry Christmas everybody.

An ORRI is carved out of a working interest, or leasehold interest and stays attached to an oil & gas lease as long as the lease is in effect. If the lease expires, the ORRI is extinguished. A royalty interest is revenue from minerals that are producing. Both are free from operating costs.

RI generally means you own mineral rights and have signed a lease under which production is occurring. An ORRI means you carved out a royalty from the lease itself. Here’s an example:

Mineral Owner owns 10 NMA in a 640-acre tract and leases at 20% royalty to Company A. The royalty would be mostly cost-free, but that is determined by the exact lease language (sometimes certain costs are deducted, again it just depends on the lease language). The royalty interest from production would be (10/640 * 0.2) = 0.003125 RI. Now, let’s assume the lessee (Company A) sells the lease to Company B, but reserves the difference between the existing lease royalty and 25%. So, Company A is reserving an override of 5% in that lease, so their ORRI is (10/640 * 0.05) = 0.00078125. This ORRI is likely cost-free in every sense, but the lease assignment document language would need to be reviewed. Lastly, the operator’s net revenue interest is (10/640 * 0.75) = 0.01171875.

As a rule of thumb, RI and ORRI are considered “cost free,” with some minor exceptions (cost to bring to market and the like) depending on document language.

Hope that helps!

They may both be free of operating costs but I can almost guarantee neither is free from the ambiguous “ post production expenses” the oil companies love to take. Devon is currently taking 50% on five year old Woodford gas wells that were drilled on a1970’s vintage ORRI that I’m certain should be free of costs. I used to like Devon but now I don’t trust them for a second.

Thank you all for your help – it’s been very useful and much appreciated!

The simplest answer is to tell you that an ORRI is not really a royalty at all. An ORRI (overriding royalty interest) is a tiny piece of leasehold working interest that will never bear its share of the costs of exploring, drilling, equipping and producing the lease. That means an ORRI is carved out of the Lessee’s ownership in the lease, not any part of the royalty reserved in the lease by the Lessor.

Quick example: Lessor signs lease with 20% royalty rate. That leaves 80% leasehold net working interest for the Lessee. The Lessee assigns a 2% ORRI to their geologist, leaving them 78% leasehold net working interest. The 20% royalty doesn’t change.

1 Like