How to Calculate Overriding Royalty Interest
Calculating an overriding royalty interest (ORI) is a crucial aspect of the oil and gas industry, as it involves determining the percentage of production revenue that a royalty owner receives from a lease or property. This article will guide you through the process of calculating an ORI, ensuring that you understand the key components and steps involved.
Understanding Overriding Royalty Interest
An overriding royalty interest is a type of royalty that gives the royalty owner a share of the production revenue from a lease or property, regardless of who holds the working interest. The ORI is typically established in a lease agreement and is separate from the working interest, which is held by the operator and responsible for the production and operation of the property.
Key Components of Overriding Royalty Interest
To calculate an ORI, you need to consider the following key components:
1. Royalty Percentage: The percentage of production revenue that the royalty owner is entitled to receive. This percentage is usually specified in the lease agreement.
2. Net Production: The total amount of oil, gas, or other hydrocarbons produced from the property.
3. Royalty Value: The value of the net production, which is calculated by multiplying the net production by the market price of the commodity.
4. Deductions: Certain deductions may be applied to the royalty value, such as production costs, taxes, and other expenses.
Calculating Overriding Royalty Interest
Now that we have a clear understanding of the key components, let’s go through the steps to calculate an ORI:
1. Determine the royalty percentage: Refer to the lease agreement to find the royalty percentage.
2. Calculate the net production: Obtain the total production volume from the property, and subtract any royalty volumes or volumes held by other parties.
3. Determine the royalty value: Multiply the net production by the market price of the commodity to obtain the royalty value.
4. Apply deductions: Subtract any applicable deductions from the royalty value to arrive at the final ORI.
Example
Let’s say you have a lease agreement with a royalty percentage of 1/8th (12.5%). The property produced 10,000 barrels of oil in a month, and the market price of oil is $50 per barrel. The production costs, taxes, and other deductions amount to $2 per barrel.
1. Royalty Percentage: 1/8th (12.5%)
2. Net Production: 10,000 barrels
3. Royalty Value: 10,000 barrels $50 = $500,000
4. Deductions: 10,000 barrels $2 = $20,000
5. Final ORI: $500,000 – $20,000 = $480,000
In this example, the overriding royalty interest for the month would be $480,000.
Conclusion
Calculating an overriding royalty interest is an essential skill for anyone involved in the oil and gas industry. By understanding the key components and following the steps outlined in this article, you can ensure accurate calculations and a clear understanding of the royalty owner’s share of production revenue.
