Oil and Gas Working Interest Explained

Most people are confused by what is a working interest of an oil and lease. It reality, it is not that complicated.

The easiest way to explain it is this: In every business there are expenses and there is income. The working interest is the ownership of the expenses. It is often abbreviated as WI in oil and gas documents.

Thus, if you own 50% working interest; it means you must pay 50% of the bills that are due for that lease. So if you own 10% WI, you pay 10% of all bills.

The first question newbies ask is "Why in the world would you want ownership in expenses?" Which is a reasonable question. The answer is quite simple – it is because the working interest owners are also entitled to a percentage of the income, called net revenue interest.

The net revenue interest is the income, the working interest is the expenses. To make this quickly apparent, I want to present a normal oil and gas lease. One landowner, one oil company. The landowner owns the mineral rights and signs a lease that gives him a 20% royalty. The oil company drills and finds oil and produces it.

The landowner owns 20% of the net revenue interest, so he receives 20% of the revenues.The oil company owns 100% of the WI, thus pays for 100% of all expenses. However, the oil company only has 80% of the net revenue interest.

If the oil company sells 50% of their WI, then they still own 50% of the WI, and 40% net revenue interest.

Bear in mind, the royalty owners net revenue interest will never change due to anything that the working interest owner does.

Source by McCartney Taylor

Leave a Reply