Working Interest

A working interest is an ownership stake in an oil or gas well that comes with both the costs and the upside of producing that well. The owner of a working interest pays a proportional share of every cost the operator runs up: drilling, completion, equipment, monthly lease operating expenses, and any future workovers. In exchange, that owner receives a proportional share of revenue from the well, after royalties are paid out to the mineral owners.

This is the kind of interest most operators and oil and gas companies hold. It is rarely the kind of interest individual mineral owners hold from inheritance, and most royalty owners never see a working interest unless they signed a lease with one of the unusual structures that grants the lessor a working-interest position rather than a royalty position.

The math: if you hold a 25 percent working interest in a well with a 20 percent royalty burden, you receive 25 percent of the 80 percent of revenue that is left after royalties are paid. You also pay 25 percent of every operating cost. In a successful well that math is favorable. In a marginal well it can mean writing a check rather than receiving one.

When inheritors discover they hold a working interest rather than a royalty interest, the common reaction is surprise, since the cost obligation can flip the asset from passive income to active expense in a low-price environment. If you are not sure which kind of interest you have, your monthly statements will tell you. Working-interest statements show both revenue and costs. Royalty-interest statements show revenue only.

Working interests can be partitioned, sold, and pooled like other ownership interests, but the buyer pool is narrower since most casual mineral buyers are looking for royalty positions, not the operational obligations that come with a working interest.