Defining Working Interest and How You Can Protect Yourself
Working interest in the oil and gas industry refers to the lease that gives authority to the landowner to participate in the drilling and production of oil and gas in his own property.
Unlike royalty interest which takes the burden of capital outlay from the landowner, working interest requires the owner to share the cost of operation.
There are two ways to do this.
The first is to ask the buyer to send you a joint operating contract that outlines your participation in the drilling process.
The next option is to create a company, which will assume the lease of the property before signing a farmout deal with an outside partner.
The farmout deal simply means that you get paid for your expenses in the drilling and establishment of the oil and gas well before you craft your working interest after the operator gets returns on his investment.
As a general rule, landowners with no prior experience in these matters are not advised to demand for a working interest when royalty interest will suffice.
But if you had to be stubborn about it, you should hire a competent oil and gas lawyer and accountant to protect your interest.
As a rule of thumb, the amount the working interest owner will spend during production is bigger than his share of royalty interest.
The windfall of this type of interest can either be big or small depending on the size of your property.
The technical term of the total acres that you can drill according to a government institution (usually the Railroad Commission) is a proration unit.
The formula for arriving at the amount of working interest and your expected royalty is very complex so you need to seek the advice of an expert in that regard.
If you can't raise the much needed capital, you can try the other tack: have the operator shoulder all the burden while you just wait for your share of the income through a royalty interest.
This is the most common deal property owners agree to for many reasons.
Among the advantages of seeking a royalty interest as opposed to a working interest is avoiding the taxman since the operator typically shoulder levy cost for property and mineral extraction.
Aside from preventing the I.
R.
S from breathing down your neck, you also ditch the legal costs that comes with the working interest.
With the right operator, you don't have to worry about any expenses incurred while drilling or making a well.
You just sit back and wait for your share in royalty income.
Unlike royalty interest which takes the burden of capital outlay from the landowner, working interest requires the owner to share the cost of operation.
There are two ways to do this.
The first is to ask the buyer to send you a joint operating contract that outlines your participation in the drilling process.
The next option is to create a company, which will assume the lease of the property before signing a farmout deal with an outside partner.
The farmout deal simply means that you get paid for your expenses in the drilling and establishment of the oil and gas well before you craft your working interest after the operator gets returns on his investment.
As a general rule, landowners with no prior experience in these matters are not advised to demand for a working interest when royalty interest will suffice.
But if you had to be stubborn about it, you should hire a competent oil and gas lawyer and accountant to protect your interest.
As a rule of thumb, the amount the working interest owner will spend during production is bigger than his share of royalty interest.
The windfall of this type of interest can either be big or small depending on the size of your property.
The technical term of the total acres that you can drill according to a government institution (usually the Railroad Commission) is a proration unit.
The formula for arriving at the amount of working interest and your expected royalty is very complex so you need to seek the advice of an expert in that regard.
If you can't raise the much needed capital, you can try the other tack: have the operator shoulder all the burden while you just wait for your share of the income through a royalty interest.
This is the most common deal property owners agree to for many reasons.
Among the advantages of seeking a royalty interest as opposed to a working interest is avoiding the taxman since the operator typically shoulder levy cost for property and mineral extraction.
Aside from preventing the I.
R.
S from breathing down your neck, you also ditch the legal costs that comes with the working interest.
With the right operator, you don't have to worry about any expenses incurred while drilling or making a well.
You just sit back and wait for your share in royalty income.
Source...