cyofish: Allow me to elaborate.
There exists a wide variety of "interests" that surround any economic venture relating to potentially producing oil & gas property mineral plays. What follows is a list:
A. Royalty Interest: It is the priority interest of a party in minerals in place in the ground, where another party has gained the right to capture such minerals under some lease agreement. Such a Royalty Interest is normally free of ALL costs of recapture, except for Treating Costs that might be specified in the lease or assignment. There are different, specified forms of Royalty Interest:
1) Land Owner's Royalty: The interest retained by the owner of the mineral rights upon signing a lease agreement. It is the reservation of a certain portion of the proceeds of the sales of these minerals at no cost to him, or to her, unless otherwise specified in the lease agreement;
2) Overriding Royalty: And interest in oil and gas produced at the surface that is free of ALL the costs of exploration, drilling and production. It is is often carved out of the Working Interest that is created by an oil and gas lease, and which is usually limited in duration to the life of the leasehold interest. It is said to be carved out, if the royalty is assigned free of ALL operating and developing costs. It is said to be reserved if the lessee assigns Working Interest and retains only a fractional share. The latter is the more common and usually results from the activities of a land broker who obtains leases for the sole purpose of ultimately assigning them to third-parties for development purposes. This form of royalty may also become a part of a farm-out agreement;
3) Term Royalty: This is more specific form of a Land Owner's royalty, which is applicable only for a specified length of time. In most lease transactions, where the holder of a Land Owner's Royalty assigns all or part of his or her interest to another, for a cash payment, a term is usually specified. If no minerals are produced during the meantime, this particular interest reverts back to the assignor;
4) Minimum Royalty: This occurs when the rate paid depends on the quality, quantity, and price of an oil and/or gas. It is the minimum payment under such an agreement;
5) Offset Royalty: A misnomer, this is really a payment from the Lessee to the Lessor, in lieu of drilling an offset well. Said paid sum is theoretically equal to the revenue that would be received by the royalty owner from such an offset well, if an offset well is required in the lease agreement. It is in reality a form of compromise in those situations where an operator does not feel that said offset well would be profitable. Owing to its intangible nature, the amount of such payment must be negotiated.
B. Working Interest: This is the Total Interest minus the Royalty. For all practical intents and purposes, it is an interest in the oil and/or gas in place that is liable for the costs of developing and operating a property. It is formed by the granting of a lease by the owner of the mineral rights. Total Interest = Total Royalty + Working Interest.
C. Operating Interest: It is the portion of Working Interest that is charged with the total operational responsibility of the lease. This particular interest handles all accounting, charging or remitting to each interest its pro-rata share of all expenses and profits.
D. Reversionary Interest: Similar to a Carried Interest, but differing only in the sense that this particular interest is held by each party for a term, but then the interest changes after a specified set of conditions has been met. A typical example might be found in a farm-out agreement (e.g., Lessee A retains 15% of a 74% Net Revenue Interest as an Overriding Royalty, UNTIL Third-Party B recovers $300,000 from drilling a successful gas well farm-out. After this recovery is met, that Overriding Royalty then "reverts" back to a 50% Working Interest, meaning that the Overriding Royalty becomes a null and void interest. Therefore, Lessee A is often said to own a 50% Reversionary Interest in the property.
E. Carried Interest: A fractional interest in an oil and gas mineral property, usually leased, the holder of which has no personal obligation for operating costs, which are to be paid by the owner or owners of the remaining fraction, who get to reimburse themselves out of production revenues, if any. The person advancing all the costs is the Carrying Party, and the other is the Carried Party. Overriding Royalty Interests are distinguishable from Carried Interests, in that an Overriding Royalty Interest is more often than not a share of the GROSS production revenues, free of costs. Unlike with Overriding Royalty Interests, Carried Interests are actually subject to the rights and privileges of any lien holder claims.
Once more, in distinguishing D (Reversionary Interest) and E (Carried Interest) above: A Reversionary Interest is sort of like a special kind of Carried Interest, involving a Carried Party having a future interest in a portion of the Working Interest, which is limited as to become possessory AFTER the Carrying Party has recovered certain specified costs during the payout period. This special arrangement can also entail an assignment and a reassignment when the Carrying Party has recovered its costs, which, when it does, the interest then becomes subject to outside claims. In other words, if such an arrangment is made wherein an interest is a reversionary interest, said interest is an Overriding Interest during the time costs are being recaptured by a Carrying Party, but once said costs are recaptured, the Overriding Interest typically adjusts ("reverts") to a different share value and becomes a real Carried Interest, which carries potential liability.
Been_Burned_Before
AI
