21 Sep Oil and Gas Net Revenue vs Working Interest: How to Calculate NRI in 4 Steps
How to Calculate NRI (Net Revenue Interest)
First, though, here’s how we defined oil and gas net revenue interest or NRI in our glossary:
Net Revenue Interest (NRI) – A net revenue interest (NRI) is the total revenue interest that a party owns in an oil and gas lease, well or drilling unit. For example, if ABC Oil Company owns 100% working interest and Joe Landowner is entitled to a 12.5% royalty, then ABC Oil’s NRI is 87.5% and Joe Landowner’s NRI is 12.5%. If ABC Oil Company owns 50% working interest and Joe Landowner still owns 12.5% royalty, ABC Oil’s NRI is 43.75% (or, 50% reduced proportionately by Joe Landowner’s 12.5% royalty).
STEP ONE: Lease Well or Unit Well?
There’s also the chance that you own the minerals outright, but this question is basically the same if you do. The key question is are you a part of a drilling unit OR do you control enough acres either through leasing them or owning them to drill a well without being a part of a drilling unit?
For the purposes of this posting, we’re assuming that you aren’t trying to calculate your oil and gas net revenue interest as a landowner. This is a post about oil and gas net revenue for the working interest owner.
STEP TWO: How much Working Interest do you Own in the Well?
Once you’ve figured out if you have a lease well or a unit well, you should next be able to figure out how much working interest you own in the well.
Working Interest – A working interest is ownership in the lease itself, including the right to drill and produce oil and/or gas. Working interest owners fully participate in the profits of a successful well and pay for all costs of drilling and operating wells, including paying royalty owners.
That’s somewhat abstract. Let’s make it real-world applicable by going straight to the following examples.
Example No. 1:
Q: If you own a lease of 100% of the minerals under 160 acres in a 640 acre drilling unit, how much working interest do you own in a well drilled in the unit?
A: 25%, because the 160 acres that you control represents 25% of the land in the drilling unit.
Example No. 2:
Q: If you own a lease of 50% of the minerals under 160 acres in a 640 acre drilling unit, how much working interest do you own in a well drilled in the unit?
A: 12.5%, because you control 80 net acres in the 640 acre drilling unit. (160 X 0.50) / 640 = 0.125 or 12.5%
Example No., 3:
Q: If you 1) own 100% of the minerals in 80 acres, 2) own 50% working interest in a lease of 50% of the minerals in 160 acres and 3) you own 100% of a lease of 100% of the minerals in 320 acres, all in the same 640 acre drilling unit, how much working interest do you own in a well drilled in the unit.
A: 68.75% working interest.
You may be thinking, “Whoa, that just got complicated fast!”
True, that’s a pretty complex scenario, but oil and gas is a business where trades happen and there’s competition for valuable leases.
Let’s break it down.
If you own 100% of the minerals in 80 acres, that’s 80 net acres of the 640 acre drilling unit.
If you own 50% working interest to a lease of 50% of the minerals in 160 acres, that’s 40 net acres of the 640 acre drilling unit.
If you own 100% of a lease of 100% of the minerals in 320 acres, that’s 320 net acres of the 640 acre drilling unit.
80 + 40 + 320 = 440 net acres
440 / 640 = .6875
That gives you 68.75% working interest in the unit.
Let it soak in for a minute.
Great! Moving on!
STEP THREE: Figure in your Royalty Burdens
Remember, your net revenue interest isn’t how much you own in the well, it’s what your cut of the revenue is. Before the working interest owners can divvy up their proceeds, royalties have to be paid out first.
Typically, landowners will be owed between 12.5% and 25% of the proceeds of oil and gas drilled on their lease. Sometimes there will be overriding royalties as well owed to landmen or geologists or to a prior company that reserved them in their sale to the current company.
Here’s one easy example:
If you own a lease covering 320 acres in a 640 acre unit and you owe 25% landowner royalties, you have 37.5% net revenue. 320 is half of the 640 acre unit and you owe 25% landowner royalties on your share of the unit, so (320 / 640) X 0.75 = 0.375 or 37.5%.
Let’s do a slight modification of the last example. This will be a really complex example. But if you can do the complex examples, the easy ones will be a piece of cake.
Net Revenue Interest Example:
In a 640 acre drilling unit, you own the following which we just determined to be 68.75% working interest in the unit:
1) You own 100% of the minerals in 80 acres. You gave a Non-Participating Royalty Interest of 3% to the person who sold it to you. That means you control 100% of the executive rights to the minerals, but you owe a 3% royalty on production in those 80 acres.
2) You own 50% working interest to a lease of 50% of the minerals covering 160 acres. You owe a landowner royalty of 12.5%
3) You own 100% of a lease of 100% of the minerals in 320 acres. You owe a landowner royalty of 25%.
What’s your oil and gas net revenue interest in the well?
Scroll down for the answer. It will be upside down, so just gently hold up your monitor and turn it a full 180 degrees to read the oil and gas net revenue interest. Be very careful with the cords.
Or, if you are reading this on a tablet or mobile phone, the screen will change as you move it. So, just place the tablet down and physically move yourself so you can read the upside down language.
No, not really. The answer will be in blue.
Keep scrolling down.
Keep scrolling down.
Ok, here is it. Calm down. The answer is you have 55.09375% oil and gas net revenue interest in the well. If you got something different, keep going at it until it makes sense. That’s the only way to learn.
STEP FOUR: Account for Special Situations
Now, let’s say you have a Joint Operating Agreement (remember that’s the agreement between working interest owners in a unit) that says that all working interest owners split royalty evenly up to 25% royalty owed on a lease.
Well, don’t you feel silly for not taking overriding royalties on everything less than 25%?
From time to time you’ll see things that are unusual that you’ll have to adjust for. But, you can do this because you understand the basics of calculating net revenue.