Working Interest

What Is a Working Interest?

A working interest is an ownership stake in an oil or natural gas well, or in the oil and gas lease covering the land where the well sits. The holder has the right to explore, develop, and produce from the property. In return, the holder pays its proportionate share of the costs of drilling, completing, and operating the well. Production revenue reaches the working interest owner after royalties and other burdens are paid.

Working interests are usually stated as a percentage. A holder with a 50% working interest generally pays half of the well's costs and receives half of the revenue left after royalties.

How It Works

A working interest owner shares in both the results and the expenses of a well. If the well produces well, the owner benefits. If the well is dry or expensive to run, the owner still pays its share of those costs. This is why working interests carry more risk than a royalty interest, which pays a share of revenue without requiring the holder to pay costs.

The operator manages the well day to day. The operator often holds a working interest too, with other investors holding the rest. Working interests can be held directly by individuals or companies, or indirectly through partnerships and programs that pool investor money.

The share of revenue an owner actually keeps is called the net revenue interest. It is calculated as follows:

Net Revenue Interest = Working Interest × (1 − Royalty Rate)

An Illustrative Example

Suppose an investor holds a 25% working interest in a well, and the lease carries a 20% royalty. The investor's net revenue interest is 25% × (1 − 0.20) = 20% of the well's gross revenue. The investor still pays 25% of the operating and drilling costs. Because the revenue share and cost share differ, the investor's economics depend on whether the well's income covers those costs.

Why It Matters to Investors

Working interests are a common way individuals invest directly in oil and gas, and they are also sold through pooled programs. Investors should understand that a working interest brings exposure to ongoing capital calls, operating expenses, and the possibility of losing money if production is weak or prices fall. Returns, costs, and terms vary widely between properties, so reviewing the specific lease and operating agreement is important before drawing conclusions.