Working Interest
A working interest is the program’s exclusive right to explore and produce oil or gas on the land covered by the lease. A working interest owner pays 100% of exploration and drilling costs, and receives all revenues from production less royalties. The amount received after subtracting for royalties is known as net revenue interest.
Carried Interest. A carried interest is an arrangement where a co-owner assigns its working interest to the other owners (the carrying parties), who agree to drill and equip a well and assume liability for the costs. The carried party is usually the owner that has sponsored the program and borne the initial costs of locating suitable properties, researching their ownership and negotiating a lease. When the owner is ready to seek outside investors, it may be unwilling or unable to bear the substantial risks of exploration. The owner will take a carried interest until some point in the exploration process is reached, after which it will convert to a working interest. All subsequent costs are split between the owners according to their original shares. The conversion may occur when a well has been drilled to the casing point, when the well is about to begin production, or at time of payout. Payout is the point in time that the initial working interest owners have fully recovered the costs of drilling and completing a well.
Example: An oil company creates an affiliate DPP, Regency Oil, to find and drill new wells next to an existing oil field. When it has acquired a proposed site and is ready to begin drilling, the sponsor company finds three willing investors, who each acquire a one-third inte