Mineral Rights vs. NPRI vs. ORRI – Understanding the different types of interests

Are you confused about the type of mineral rights or royalty interest that you own?  Maybe you thought you owned the mineral rights, and someone said your interest was not in minerals but rather an NPRI (which stands for non-participating royalty interest) or an ORRI (which stands for overriding royalty interest).  We’re here to help.

But first, a quick aside.  If you are interested in tracking the value of mineral rights over time, you might find our Mineral Rights Price Index interesting.  Updated monthly, our Mineral Rights Price Index tracks the monthly price changes for mineral rights in West Texas and North Dakota, Wyoming, and Colorado based on hundreds of data points for actual transactions in these areas.

In the United States, there are a variety of real property interests that relate to the ownership of oil and natural gas resources.  The following is a high-level overview to help you understand the key interests that are often owned by private parties.

  • Mineral Rights.  Mineral rights, or mineral interests, are the type of interest that most people think of when they hear of someone who “owns the minerals.”  Mineral rights give the holder two primary rights – the right to lease the minerals to an operator (and collect a lease bonus) and the right to collect as a royalty a fixed percentage of the gross proceeds from the sale of the oil and gas produced from all wells drilled on the acreage or any drilling unit into which the acreage is pooled.  In the typical scenario, a person who owns a mineral interest would first enter into an oil and gas lease with an operator who will drill the acreage.  The oil and gas lease would provide that the mineral interest owner gets paid as a royalty a fixed percentage (usually between 12.5% and 25%) of the gross value of the oil and gas produced from wells that are later drilled.
    • Drilling obligation. Oil and gas leases usually state that an operator must drill at least one well within the first three years after signing the lease.  If no well is drilled, then either (1) the operator must pay a renewal bonus to the mineral interest owner, which extends the time by which a well must be drilled by another two years or (2) the lease expires, and the mineral interest owner is free to lease to someone else (and collect another lease bonus).
    • Often only get one shot to lease. Once a well has been drilled, the mineral interest under most oil and gas leases is now considered to be “held by production” or “HBP.”  This means that the lease stays in effect until the wells on the property stop producing, which could continue to produce for decades into the future.  The takeaway for mineral interest owners is to be extremely careful when entering into an oil and gas lease, as this may be your only chance to collect a lease bonus and to negotiate for the terms that you want!
    • Right is perpetual. When you own a mineral interest, that right never goes away.  It is a perpetual interest that you will own forever (or until you transfer it to someone else, whether through sale or due to death).
  • Non-Participating Mineral Interest or “NPRI.”  An NPRI is nearly identical to a mineral interest, with one key difference.  The NPRI owner still holds the right to receive all royalties paid by an operator from wells drilled on the acreage, but the NPRI holder does not have the right to lease the interest to an operator (or collect the corresponding lease bonus).
    • No right to lease the property. For an NPRI owner, the right to enter into an oil and gas lease (which is called the executive right) has been given to someone else.  This means that someone else (not the NPRI owner) will be responsible for negotiating the terms of the lease, including, most importantly, the royalty percentage payable to the NPRI owner.  This introduces some risk to the NPRI holder, because if the person who has the right to lease your property agrees to a low royalty (such as 12.5%) rather than a high royalty (such as 25%) then the NPRI holder will only get half the royalties that they would have received with the high royalty.
    • Right is perpetual. When you own an NPRI, that right never goes away.  It is a perpetual interest that you will own forever (or until you transfer it to someone else, whether through sale or due to death).
    • NPRIs typically less valuable than mineral interests. Because NPRIs do not have a right to lease the interest or collect a lease bonus, NPRIs are usually considered to be less valuable than mineral interests.
  • Overriding Royalty Interest or “ORRI.” An ORRI, which people sometimes refer to as an “override,” is a royalty interest that is carved out of the working interest of a lease and represents the right to receive a fixed, cost-free percentage of production or revenue from production from a lease.
    • ORRIs are not perpetual. Unlike mineral interests and NPRIs, ORRIs typically expire at some future date.  ORRIs usually remain in effect only until the associated lease expires.  Whether an ORRI is likely to remain in effect for decades or days is entirely dependent upon the term of the oil and gas lease that it is tied to and the remaining productive life of any wells drilled under that lease.
    • ORRIs can be limited in other ways.  ORRIs can be subject to other limits, such as depth limits.  For instance, the ORRI owner’s right to receive royalties may be limited to oil and gas produced from certain depths (sometimes called “shallow rights” or “deep rights”).  We see this frequently in the Permian Basin, and particularly the Midland Basin where oil and gas have been produced for a century.  For decades, oil in the Midland Basin in West Texas has been produced out of a formation called the Spraberry.  Some ORRIs have clauses in them that effectively limit royalties payable on the ORRI to the Spraberry formation and any shallower formation above the Spraberry.  In the last decade, the Wolfcamp formation, which is a deeper formation that lies below the Spraberry, has begun to be drilled through horizontal drilling.  Because the Wolfcamp is deeper than the Spraberry, an ORRI owner whose interest is “depth limited” may not be entitled to any royalties at all from new wells drilled in the Wolfcamp.
    • ORRIs are less valuable than mineral interests and NPRIs.  ORRIs are less valuable than mineral interests and NPRIs because of three primary factors:  (1) ORRIs are not perpetual; (2) an ORRI holder cannot typically collect a lease bonus; and (3) ORRIs can be limited in other ways, such as depth limitations, that could limit the amount of royalties paid for new drilling in ways that mineral interests and NPRIs are not usually limited.
  • Working Interest.  If you own a working interest, you are likely very familiar with what it is.  Unlike all of the other interests described on this page, a working interest owner must put up his or her pro rata share of drilling costs to drill wells.  Whereas owners of mineral and royalty interests (such as NPRIs, ORRIs, and mineral interests) do not have to put up any money for wells that are drilled, a working interest owner must put up money – sometimes very substantial amounts – to “participate” in the well and have the right to receive a share of the production from the well.
  • Other Types of Interests.  There are other, even more exotic types of mineral and royalty interests.  We won’t go into detail on these, as they are quite rare.  Some of these interests are:
    • Executive rights only – Gives the holder the right to lease a property and collect the lease bonus, but does not include the right to receive royalties from production.
    • Non-executive mineral interest – Gives the holder rights similar to a NPRI in that the holder has no executive right to lease, but differs in that the holder typically includes the right to share in lease bonuses and similar payments.  In other words, someone else (not you) negotiates the oil and gas lease and lease bonus, but you still get your share of the lease bonus (which was negotiated by someone else).
    • Term mineral interest – Gives the holder all of the rights described under “Mineral Interest” above but only for a fixed or finite period of time.  In other words, these interests are not perpetual.  These are sometimes created through a deed and other times created through the laws of certain states (such as Louisiana).

Have other questions about your interest?  Please feel free to contact us.

Remember, laws vary a lot from state to state, and your interest may also vary based on the terms of the lease.  You should always consult with an attorney if you have specific legal questions about your interest.

Helpful Resources for Mineral Owners