Concerns And Considerations In Overriding Royalty Interest Transactions

Keywords: ORRI, Overriding royalty interests, internal rate of return, IRR

Overriding royalty interests, commonly referred to as ORRIs, have been used for decades by oil and gas exploration and production companies as mechanisms for obtaining funding, particularly in situations where more traditional methods, such as bank loans, are not available on attractive terms. An ORRI is an interest that is carved out of the lessee's leasehold working interest and transferred to a third party in exchange for assets—typically cash—specified in the transfer documents.

ORRIs come in two forms (though there are many variations of each): "term" ORRIs, and "perpetual" ORRIs. Term ORRIs are limited in duration, either by a period of time or until the project produces a specified quantity of hydrocarbons or proceeds from the sale of those hydrocarbons. So-called dollar-denominated, or volumetric production, payments generally provide for the reversion to the grantor of the interest