Oil and Gas – A Timeless Goldmine Buying oil and gas royalty interests has become a popular trend among energy companies. This is particularly because it helps them serve their purpose and extract oil and gas without actually buying land and tying up their capital in land. In comparison to buying land to extract minerals and hydrocarbons, buying oil and gas royalty interests, is much cheaper.
The masses are usually unaware of the concept of a working interest of an oil and gas lease. It is not necessarily as complicated as perceived by the masses. This is probably the simplest way to explain the concept of a working interest of an oil and gas lease; every business has expenses and returns (profits/income). In a running business, the working interest means the ownership over the expenses too. In the documents it is denoted as WI.
Therefore, if a person owns 50% of the working interest of a company, that means they will have to pay 50% of the expenses and bills of that particular company too. Similarly, if someone owns merely 30% of the working interest, they will be paying 30% of the bills and expenses of that business or company.
A naïve mind would probably ask why anyone would even want ownership of the expenses in the first place? And the question is not as dumb as the experts believe it is. The answer is relatively simple and self-explanatory though – when you take ownership of the expenses, you automatically get entitled to receive the same percentage of the profits and income too. This means that the partners with a working interest in the company, earn higher revenue than other shareholders and partners. They are legally entitled to claim the revenue interest.
Revenue interest is the business terminology for the income and profits. Putting all these concepts in the context of an oil and gas lease, if someone has 40% working interest of a certain oil and gas lease, they will be entitled to 40% of the profits and income earned from that particular lease too. However, 40% is a very high
percentage for a working lease because the oil and gas extraction costs are extremely high and therefore, shared between several working interest partners to make it affordable. So when several working interest partners get together and join with an oil company, it becomes possible to drill and find oil and process it.
There are, however, some oil companies, especially the huge ones that own 100% of the working interest and therefore, they earn all the profits from the lease without being entitled to share income or profits with anyone else. This occurs when the landowner is given a particular amount as a signing bonus and not promised a royalty. In the case of a royalty, usually, the landowner receives around 20% of the net revenue interest and the oil company gets to keep the remaining 80%. The percentages depend on the contract and its terms and conditions that are agreed by both the parties signing the contract. https://vimeo.com/124907799