After you lease the mineral rights to the land beneath your property, you can earn additional income by allowing an oil and gas company to set up a production site on the land. Once the well starts producing, the mineral rights owner can earn royalty interest or landowner’s royalty from the sale of the oil and gas extracted from their land.
What are Overriding Royalty Interest Payments?
Geologists, landmen and brokers may also be offered compensation from the earnings as repayment for their involvement in the business transaction. These payments are known as overriding royalty interest or ORRI.
The payments are tied to the land lease, and expire when the lease ends, unlike mineral or royalty interest, which are perpetually linked to mineral rights ownership. Payments do not extend to future leases on the land. Each time a new land lease is created, overriding royalty interest payments must be reestablished.
Who Pays the Overriding Royalty Interest?
These payments are carved out of the proceeds from the sale of oil and gas designated for the lessee. Therefore, payment initially comes from the oil and gas company and may later be handled and disbursed by the lessee’s financial advisor or lawyer. Most payments are made on a monthly or annual basis depending on the sum.
It’s not unusual for overriding royalty interest payments to vary. Each payout is based on production output, market value, seasonal conditions, downtime and contractual changes. If you receive more than $600 in a calendar year in overriding royalty interest payments, you will receive a 1099 tax form to claim the money as income during your annual tax filing.
Some companies will expect overriding royalty interest owners to pay a percentage of the production costs and severance taxes related to the mineral rights being mined. Read your contract carefully to learn if this is part of your overriding royalty interest agreement.
Being offered overriding royalty interest payments is a benefit offered to people involved in the oil and gas production process, but who don’t own the mineral rights to the area being explored and mined. These recipients strictly receive a portion of the profits from well production for the duration of the lease. This type of temporary passive income is ideal for growing a savings account or financial investment for your children.