Don,
Here is the definition from the BLM from document H-3106-1 - "IV. Transfers by Assignment, Sublease, or Otherwise.", para. 2:
"An overriding royalty interest (also called an override or ORI) is similar to the royalty interest in the sense that it represents a share of the production over the lessor's royalty interest. An overriding royalty interest is a fractional interest carved out of the lessee's share of interest in the oil and gas product, free of any expense for exploration, drilling, development, operating, marketing, and other costs incident to the production and sale of oil and gas produced from the lease. A party holding a lease interest is entitled to some portion of the royalty interest from production that may create an overriding royalty by reserving a set portion of that production, usually expressed as a percentage of the total production, to the party when transferring or assigning all or a portion of the lease interest. A second method of creating an ORI is by transfer from a party holding the right to production from the leasehold to any other party"
In other words and to my best understanding, when you obtain a new lease from the source such as a county, state, and BLM (Bureau of Land Management), you are obligated to pay that source a production royalty. If you purchase a lease from a private source the chances are very good that the ORRI was stripped off by the original lease holder and won't be included with the purchase and if it is available it would most like cost you a premium for the right to include the ORRI rights. In addition, as the original lessee can you reserve an added on percentage for yourself if the lease ever produces while it in the public domain. This to my understanding should be no more than 5% or the lease could be considered overburdened with royalties...but it can be any number you and the buyer agree upon. The ORRI is only paid on production so just by assigning a percentage for your ORRI does not mean that the field will ever produce for you to collect anything. Once you assign an ORRI if someone wants to produce on your lease and/or when you sell it, the ORRI carries on thru the life of the lease regardless who the owner is as long as it stays in the public domain. Once it goes back to the source it is considered a brand new lease and the current ORRI is erased the next owner can have the ORRI rights and it starts all over again. It can go back to the source for a number of reasons including non-payment of yearly fee, surrender by leaseholder, or withdrawn by the source.
My suggestion would be to call any BLM office (ask for the Public Room) and ask about how an oil & gas lease works and how the ORRI works. They are very helpful and would be much more qualified to give you an answer.
I hope this helps.
George
