Interest Calculations

by Lewis Williams

 

Interest calculations are not for the faint of heart! There are many different types of interest one may own in and to an oil or gas well. For example, if you are the mineral owner, then your interest in the well is abbreviated as MI - mineral interest and is based on that fractional value represented on your Lease. Make no mistake, if you own 100% of the MI, then the Oil and Gas Lease functions to convey to the Lessee a part of your interest for a specific term of time. If the well is producing, you would also have a royalty interest which you might guess correctly is abbreviated as RI.  However a royalty interest does not exist if there is no production.

Now your Lessee, whom you signed your lease with has what is called a "working interest" abbreviated as WI. For the purposes of example we will consider a lease that will pay you the mineral owner a 1/8 royalty on any production. That leaves a 7/8 WI for the operator, or Lessee and or their agents.

Gross Acres - The total acres contained in the land described in the lease or other conveyance.

Example: If Bill owns the SE/4 Section 6, he owns 160.00 gross acres.  If Sam owns 58.26 acres out of the A. B. Smith Survey, A-123, Frio County, Texas, as described (...), he owns58.26 gross acres.

Net Acres - The gross acres multiplied by the mineral interest.

Example: If Bill owns 25 percent of the SE//4, he owns an undivided 1/4 mineral interest and owns 40.00 net acres (.25 X 160 = 40.00).  If Sam owns a 30 percent interest in the 58.26 acres tract above, he owns an undivided 0.30 mineral interest and owns 17.478 net acres (.30 X 58.26 = 17.478).

Royalty Interest (RI) - The property interest created in oil and gas after a severance by royalty deed or lease.  Under a lease calling for a 1/8 royalty, the lessor has a 1/8 royalty interest.

Net Revenue Interest (NRI) - The share of revenue, expressed in fractions or decimals.  The portion of production proceeds owned.  In a lease with a 1/8 royalty, the lessor has a 12.50 percent NRI and the lessee has an 87.50 percent NRI.  The lessee also holds a 100 percent WI in the lease.

Example: Bill owns the above tract (SE/4 Sec. 6) and owns an undivided 25 percent mineral interest and leases to World Oil, reserving a 3/16 royalty.  World oil drills a well on the SE/4, Bill's NRI in the tract or well is:   MI x RI = NRI, so 0.25 X 0.1875 = 0.046875.

Non-Participating Royalty  (NPRI) - An expense free interest in oil and gas created out of the mineral owner's interest, often before a lease is created.  If a mineral owner conveys by royalty deed a 3 percent royalty interest, that grantee now holds a 3 percent non-participating royalty, to be paid out of the royalty interest.

Overriding Royalty Interest (ORRI) - An interest in gross production of oil and gas carved out of the lessee's share of the oil and gas (the working interest) and which is free and clear of all expenses, often expressed as 3 percent of 8/8 or 2.5 percent of 7/8, depending on the tract (3 percent of 8/8 - 3.00 percent; 3 percent of 7/8 = 2.625 percent).

Burdens - Typically, burdens are against the working interest - royalty, ORRI, and production payments.  However, NPRI is a burden against the mineral owner.

Payout - Generally, the point in time when production revenues from a well (or zone, or geologic horizon) equal expenses (including operating costgs, royalties, other burdens and taxes). Payout can be calculated for expenses associated with small or large operations.  A small operation might be "cleaning out" an old well to stimulate production a large operation might be the drilling of an entire well (spud through completion).

After Payout (APO) - Interest owned after a well has paid out; usually used in farmout and other well trade agreements.

Before Payout (BPO) - Interest owned before a well has paid out; usually used in farmout and other well trade agreements.

 

 

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