Oil and Gas Ownership Interests: Calculating Working Interest

In part one of this multi-part blog series, we went over some of the primary basics on ownership within the oil and gas investment field. For those entering or expanding their interests in this area, knowing how ownership interests and working interest work will often be very important, playing a key role in helping you understand whether a given investment is or isn’t a prudent one. 

At Legacy Exploration, LLC, we’re here to assist clients with a variety of oil and gas investment themes and tactics, from the tax benefits associated with such investments to assistance for accredited investors, investing in oil stocks, and much more. In today’s middle section of our blog series, we’ll go over the different types of working interest and how it’s calculated, while in part three we’ll look at areas like tax considerations, risk mitigation and more. 

Working Interest Types

There are a few different designations of working interest within oil and gas investment areas. They include the following types:

  • Operating working interest: This refers to the interest held by the person or group who operates the drilling equipment. Those with this interest are in charge of paying for operational costs, including paying each royalty owner. 
  • Non-operating working interest: This is an interest in the oil well, lease, or another unit of production that involves no operational duties. 
  • Carried working interest: A partnership contract between multiple parties who have working interest in the well. These may be shared through joint ventures where a group is in charge of financial backing, meaning individual contributors can invest without being involved in daily operations, then receive a share of the revenues down the line. This is done on a pro-rata basis that our team can explain to you if needed.

NRI

NRI stands for net revenue interest, and it’s important to be aware of also. It’s the percentage of production revenue that an operator or investor receives, and it’s calculated using working interest amount and then by deducting royalty interests. 

How to Calculate Working Interest for Oil and Gas

An investor’s NRI, then, is their total revenue share. However, it will take some calculation to determine the specific revenue interest owned by a given part – there may be mineral rights and royalty owners with shares of varying sizes, for instance, or several different working interest holders who may hold full units or fractional units. 

As a simple example, pretend royalty rights holders in a given investment are entitled to 20% of total revenues. What’s derived from the production unit after royalties will then be 80%, and if a single party holds the working interest here, this will be the full amount they receive. However, if multiple parties all have shares, they will divide this 80% into smaller, fractional interests. 

One important note: The above does not depend on the productivity of the drilling. Just because one party’s share of the geographical area happened to be more productive than another’s does not mean there will be any changes in net revenue division; the calculations will be done in precisely the same way. 

For more on working interests in oil and drilling investments, or to learn about any of our oil investment opportunities, speak to the staff at Legacy Exploration, LLC today