Working Interest

Working Interest Oil Business Development Costs Operation Costs Oil and Gas Property Energy Sector Revenue Interest Ownership Interest
A customary seven-eighths interest in the oil business that bears the cost of development and operation of an oil or gas property.
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Definition

Working Interest is an ownership interest in an oil and gas property that allows the holder to participate in the development, operation, and production expenses associated with the property. It is typically expressed as a seven-eighths (87.5%) interest, with the remaining one-eighth (12.5%) often assigned as a royalty interest to the landowner or mineral rights holder.

Examples

  1. Oil Wells: A company may hold a 70% working interest in an oil well, meaning they bear 70% of the development and operating costs while receiving 70% of the generated revenues.
  2. Joint Ventures: Two companies might enter into a joint venture where each holds a 50% working interest in a gas field, thereby sharing both the costs and revenues equally.

Frequently Asked Questions

Q1: What is the primary difference between a working interest and a royalty interest? A1: A working interest allows for an active investment in the operations and costs of a property, whereas a royalty interest allows for revenue participation without bearing any operational costs.

Q2: Can a working interest be transferred or sold? A2: Yes, working interests can be sold, assigned, or transferred to another party, subject to the terms of the original agreement.

Q3: What are the financial risks associated with holding a working interest? A3: Holders are obligated to cover their share of development and operational expenses, meaning financial losses can occur if the property does not yield sufficient revenue.

Q4: How are revenues distributed in a working interest arrangement? A4: Revenues are distributed based on the proportion of the working interest held by each party after all operational and development costs are deducted.

  • Royalty Interest: A share of the production revenue from oil and gas properties, free of the cost of production.
  • Net Revenue Interest (NRI): The total revenue interest remaining after royalties and other non-operating interests are paid.
  • Operating Agreement: A contract between the parties holding working interests, detailing their rights, expenses, and responsibilities.
  • Overriding Royalty Interest (ORRI): A revenue interest in the oil and gas production, free from the obligations of cost or operations.

Online References

  1. Investopedia: Working Interest
  2. U.S. Energy Information Administration
  3. American Petroleum Institute (API)

Suggested Books for Further Studies

  1. Oil & Gas Production in Nontechnical Language by Martin S. Raymond and William L. Leffler
  2. Fundamentals of Oil & Gas Accounting by Charlotte J. Wright
  3. The Global Oil & Gas Industry: Management, Strategy and Finance by Andrew Inkpen and Michael H. Moffett

Fundamentals of Working Interest: Energy Sector Basics Quiz

### Who typically bears the cost of development and operations in a working interest arrangement? - [x] The holder of the working interest - [ ] The landowner - [ ] The government - [ ] The community > **Explanation:** The holder of the working interest is responsible for the costs associated with developing and operating the oil or gas property. ### What percentage is commonly associated with a working interest in an oil and gas property? - [ ] 50% - [x] 87.5% - [ ] 75% - [ ] 100% > **Explanation:** The working interest is customarily 87.5%, leaving the remaining 12.5% for royalty interests. ### What is a primary risk associated with holding a working interest? - [ ] Increased royalty payments - [x] Bearing the operational and development costs - [ ] Ownership disputes - [ ] Environmental regulations > **Explanation:** Holders of a working interest must bear the cost of development and operations, posing a financial risk if the property does not produce sufficient revenue. ### Which interest does NOT participate in the operation costs of an oil and gas property? - [ ] Working interest - [ ] Net revenue interest - [x] Royalty interest - [ ] Overriding royalty interest > **Explanation:** A royalty interest does not bear any cost of the operations and instead enjoys a share of the production revenue. ### Can a working interest be sold or transferred? - [x] Yes, it can be sold or transferred. - [ ] No, it must be retained permanently. - [ ] It can only be transferred to family members. - [ ] Only the government can permit transfers. > **Explanation:** A working interest can be sold, assigned, or transferred to another party. ### Who shares the revenues in a joint venture with working interests? - [ ] Only the largest interest holder - [x] All holders of the working interest proportionally - [ ] The government and the largest interest holder - [ ] Only the operator of the joint venture > **Explanation:** Revenues are shared among all the holders of the working interests proportionally based on their share. ### Which document details the rights and responsibilities of working interest holders? - [ ] Lease Agreement - [ ] Purchase Agreement - [x] Operating Agreement - [ ] Non-Disclosure Agreement > **Explanation:** An Operating Agreement details the rights, responsibilities, and obligations of all parties holding working interests in the property. ### What fiscal benefit does a holder of a working interest enjoy? - [x] Direct share in production revenues - [ ] Exemption from taxes - [ ] Government subsidies - [ ] Unrestricted drilling rights > **Explanation:** A working interest grants a direct share in the revenues produced, based on the percentage of ownership. ### What term describes the total revenue remaining for working interest holders after royalties are paid? - [ ] Gross revenue interest - [x] Net revenue interest (NRI) - [ ] Gross profit - [ ] Revenue after expenses > **Explanation:** The net revenue interest (NRI) is the total revenue remaining for distribution to working interest holders after royalty and other non-operating interests are paid. ### In a working interest arrangement, who is free from production costs but benefits from production revenue? - [ ] Working interest holders - [ ] Joint venture partners - [ ] Operating companies - [x] Royalty interest holders > **Explanation:** Royalty interest holders benefit from production revenues without being subjected to the costs of production or operations.

Thank you for exploring the significant aspects of working interest in the energy sector. Stay informed and continue enhancing your expertise in the dynamic field of oil and gas.

Wednesday, August 7, 2024
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