If you’re an investor considering entering the oil and gas industry, there are several entry points potentially available to you. This can be a complex area in some situations, and it’s important to understand how oil and gas ownership works within different settings – something a good oil and gas investment partner will assist you with.
At Legacy Exploration, LLC, we’re here to help with numerous oil and gas investment tactics and themes for our clients, from oil investment tax breaks to benefits for accredited investors, tips on how to invest in oil, and more. When it comes to entering the oil and gas investment world, it’s vital to understand ownership interests and what’s known as working interest, which will often play a key role in whether a given investment is prudent for you. This multi-part blog series will go over everything you need to know here if you’re thinking of entering this market.
When oil or gas resources sit below the ground, there are multiple types of ownership that might be at play. While the owner of the land itself has mineral rights, there’s more to know here. Some areas to keep track of:
- Landowner rights: Again, the landowner holds what are known as mineral rights here. Most projects, then, take place on land that’s been leased from its owners, who receive royalties based on a percentage of oil and gas production. Landowners also have the option to sell their mineral rights, but leases tend to be their preferred option, keeping them in a better position in most cases. Leases allow for terms like points of access, allowable work hours, and more.
- Royalty Interest (RI or ORRI): In some cases, the landowner may choose to sell the lot to a buyer while holding a royalty interest in the oil drilling for themselves, accruing royalties over time.
- Working Interest (WI): This is a type of ownership stake that can be held in a lease, well, or drilling unit. It refers to an owner’s share of the expenses required to develop or operate wells.
Forms of Revenue Division
When revenue is generated from oil drilling, royalties to owners are paid out first. Here’s how this realm works:
- Royalty interest: The royalty interest owner earns payments from any gas or oil extracted, though they might be subject to deductions for post-production work.
- Overriding royalty interest: These are interests that last through a specific lease period and are represented by stakes in a portion of the revenue, not the actual oil itself.
- Non-participating royalty interest: The holder of this interest will have a lower level of rights than either of the above. These interests are often sold as a method of fundraising.
For more on ownership interests, working interest, and other factors in oil and gas investment, speak to the staff at Legacy Exploration, LLC today.