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Mineral rights come in three forms: minerals, royalties, and overriding royalties. All are similar in that they share on a pro rata basis in the production of oil and gas from the lands they cover, and also in that they do not share in the costs associated with drilling and producing the same oil and gas. Beyond those similarities, there are inherent differences.

Mineral owners typically have the right to negotiate and sign leases on their minerals as well as the right to receive bonus consideration and yearly rental payments. They also have the right to receive royalty payments as outlined in the lease. Royalty owners have the right to receive royalty payments for the oil and gas produced from the lands under which they own royalty, however, no right to lease and receive bonus and rental payments from the lease. Both however, are considered real estate for tax purposes.

Overriding royalty interests are not considered real estate since an override is carved out of the actual oil and gas lease as opposed to being part of the minerals under the ground. An overriding royalty interest shares on a pro rata basis in the production obtained from an oil and gas lease however, once the lease has ceased producing and expired by virtue of its own terms, the overriding royalty expires as well. The owners of mineral and royalty interests maintain ownership after production ceases.

In many states it is possible to separate a real estate property into a surface interest and a mineral interest. A mineral interest can be sold, wholly or partially, independently from a property or retained upon sale.

Reasons to sell include:

  • Need or desire for cash
  • Concerns about the economy
  • Belief that oil and gas prices will remain depressed
  • Mitigating the risk associated with a dry hole and the associated devaluation of the mineral property
  • Mitigating the risk associated with mechanical or operator error
  • Preference for a larger lump sum payment over smaller royalty payments over time
  • Estate planning
  • Liquidation of assets
  • Tax advantages