Working Interest

A customary seven-eighths interest in the oil business that bears the cost of development and operation of an oil or gas property.
On this page

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

Loading quiz…

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.

Working Papers
Working Capital Adjustment