A royalty is a payment to the royalty owner based on a percentage of the gross well production without the working interest owners' associated responsibility for any expenses.

There are two types of royalties - lessor royalties and overrriding royalties.

• Lessor royalties represent the mineral title owner's share of production, free of production expenses. Mineral title lands are held in perpetuity. When a company wants to drill for oil or gas, it must negotiate for the mineral rights with the mineral title owner (the Crown or a freehold owner). When the mineral title owner leases those rights to a company to drill for oil or gas, it generally retains a percentage share of production, called a lessor royalty.
• Overriding royalties arise primarily from contractual arrangements between companies and are usually derived from working interests that expire when production ceases.

We own both mineral title rights and gross overriding royalties, but our mineral titles lands are our most valuable asset. Our ownership in mineral titles ranges from 10% to 100%. Leases provide for a royalty payment ranging from 10% to 22.5% of production. For example, if our ownership is 50% of the mineral title and the royalty rate applicable to the lease is 20%, then we are entitled to receive the proceeds from the sale of 10% of the oil or natural gas produced (50% x 20% = 10%).