Understanding Working Interest and Non-Op Working Interest
Working Interest ownership is considered a tangible asset and is treated like real property as it can be sold, transferred, and titled to other owners and explorer/operators.
Preamble: Landowners who have determined that their land sits over oil and gas deposits enter into a Lease Agreement with an oil and gas explorer/operator to exploit the subsurface portion or minerals of the land (known as “Mineral Rights”). The Landowner’s ownership of Mineral Rights is limited to the footprint of the surface property, or surface lot boundary. Exploitation of the Minerals Rights by the explorer/operator has minimal involvement of the surface land itself, however, Lease Agreements typically include easements to allow operators access to roads and to limited use of surface areas (i.e., for drilling rigs, pumpjacks, oil and water storage tanks, equipment inventory, etc.), and extend and remain active in perpetuity so long as the minerals are being exploited by the operator and/or future operators who assume ownership control of the Lease.
Working Interest (WI): is the ownership stake in an oil and gas Lease that grants the Lessee holder the right to explore, drill, develop, and produce oil and gas from the subject property’s Mineral Rights for profit. Working Interest ownership is considered a tangible asset and is treated like real property as it can be sold, transferred, and titled to other explorer/operators, and the Lease Agreement remains enforced so long as the Mineral Rights are being exploited by the explorer/operator in part, for the benefit of the Landowner. Landowners retain an ownership percentage in the Mineral Rights, known as a Royalty Interest (RI), and receive royalty payments from oil and gas purchaser as a result. Typically, the ownership split of Mineral Rights between the WI and RI is 80 percent to the Working Interest holder and 20 percent to the Landowner. The Landowner does not bear any exploration, development, production, or ongoing operating costs incurred by the explorer/operator, nor does the operator’s profitability, or lack thereof, affect the Royalty Interest. Therefore, and most recently via The Federal Oil and Gas Royalty Management Act of 1982 (30 USC § 1701 et seq.), RI owners are to receive its share of production revenue before the WI holder/owner receives their share of revenue from all oil and gas production proceeds. Payments are divided and made directly to the Landowner and WI owner by the purchaser of the oil and gas pursuant to Division Orders recorded with the County or government entity having jurisdiction over the subject property. The net amount of revenue paid by the oil and gas purchaser to the Working Interest holder/owner is known as the Net Revenue Interest (NRI). Therefore, the Working Interest holder, or the explorer/operator, calculates its business viability by subtracting all operating costs, its general and administrative expenses, and target profit from the NRI amount paid to the explorer/operator. In sum, explorer/operator pays 100% of the costs from about 80% of the revenue.
Non-Operated Working Interest (Non-Op): also has an ownership stake in the Working Interest of an oil and gas Lease but does not, or has limited, participation in operational decisions. A Lease’s Working Interest owner may have carved a portion of its Working Interest and offered it to investors to raise capital or to mitigate risk, and the ownership of Non-Operated Working Interest is the same as Working Interest in that it is also deemed a tangible asset and can be sold, transferred, and titled to others. The NRI is then split and paid to the WI and Non-Op owners pursuant to the Division Order recorded with the County or government entity having jurisdiction over the subject property. The Non-Op owner is responsible to pay its share of exploration and operating expenses to the WI owner as detailed in a Joint Operating Agreement (JOA) agreed to and signed by the WI and Non-Op owners. The JOA is a standardized agreement that may include an addendum that could offer prior approval covenants to the Non-Op owner for some operational decisions (i.e., drilling new wells, or other major expenditures, etc.), but the Working Interest owner has responsibility and control over day-to-day operations of the Lease, and has ultimate performance responsibility for the Lease. Should the Non-Op owner not pay its share of the exploration or operating expenses as agreed to in the JOA, the WI owner must advance paying all expenses and separately seek recourse against the Non-Op owner for non-performance. Non-Op ownership of Working Interests differs from RI and ORRI in that Non-Op owners assume operating risk to participate in operating profit, whereas RI and ORRI owners have no such opportunity.
