Interest-ing

A person or company that owns working interest in a lease has the right to explore, drill and produce oil and gas. The working interest owner is responsible for the costs associated with such activities, but this cost may be shared amongst multiple working interest owners. If a parcel is leased, then the lessee and/or its assignees own the working interest in that particular lease. If it is not leased, then the mineral owner owns the right to explore, drill and produce oil and gas on his/her own land. In most cases, an individual landowner would lack the resources and know-how to do so, but if an oil and gas company owns the mineral rights to a parcel, they could produce the oil and gas from that parcel themselves.

Because an individual landowner has the right to explore, drill, and produce oil and gas from his/her land, but is often unable to do so, it makes more sense to lease those rights to a company that has the requisite knowledge and capital. By executing a lease, the mineral owner typically allows the lessee and/or subsequent assignees to explore for, and produce, the oil and gas in exchange for bonus and royalty payments. A royalty interest entitles the royalty owner to a portion of the revenue from any oil & gas without the accompanying risk or responsibility for the costs. Thus, both parties benefit. The lessor benefits from the revenue received from the oil & gas that he/she would have otherwise been unable to access, and the lessor is able to produce oil and gas without having to purchase the mineral interest outright. In a couple weeks we will talk more about some different types of royalty interests.