Working Interest Vs Royalty Interest - Which is Better?
Working interest is defined as an agreement entered into by the property landowner and the operator to share in the cost of the oil production.
This happens when the interest owner insists on taking part in the drilling of oil and gas in contrast with royalty interest, for example, which occurs when the buyer takes care of all the cost and burden of production while giving the owner his share at a fixed term.
The property owner can negotiate what type of working interest by requesting the operator to present to you a joint operating contract which lists your authority and constraints in the production.
The second is to build a corporation that can lease the property before entering into a "farmout deal" with the operator.
The second option allows the operator a bit of elbow room to recover his investment before you are paid your working interest.
If the landowner is a novice in oil and gas production, insisting on a working interest as opposed to a royalty interest is a bad idea.
However, if you insist on doing one, it's important to have a good lawyer or accountant with you during the whole negotiation process.
Computing the amount is very complicated.
In simple terms, your percentage share in the production cost is much bigger than the percentage share in royalty.
Your bottomline income may or may not be bigger depending on your land area and your apportionment in the proration unit, which is basically the size of property that you can touch according to the government.
You have to apply with the Railroad Commission for this.
Now, don't go around computing the amount of your share in the working interest and don't just take the word of the operator as to how much.
This is an area where you need the recommendation from your lawyer or accountant.
If you really have no money, you can still earn from your oil and gas property by negotiating for a royalty interest.
That way, the operator or buyer can drill and build wells immediately without delay.
This is least complicated way to earning money out of your property, anyway.
As you know, these things are not free.
Depending on the county where your property is located, the government can wring you dry in terms of legal costs and taxes.
Why not pass that nasty bit on to the operator and let him deal with the taxman? Remember, when you have no prior experience swimming professionally, don't wade into the water that's too deep for your own good.
This happens when the interest owner insists on taking part in the drilling of oil and gas in contrast with royalty interest, for example, which occurs when the buyer takes care of all the cost and burden of production while giving the owner his share at a fixed term.
The property owner can negotiate what type of working interest by requesting the operator to present to you a joint operating contract which lists your authority and constraints in the production.
The second is to build a corporation that can lease the property before entering into a "farmout deal" with the operator.
The second option allows the operator a bit of elbow room to recover his investment before you are paid your working interest.
If the landowner is a novice in oil and gas production, insisting on a working interest as opposed to a royalty interest is a bad idea.
However, if you insist on doing one, it's important to have a good lawyer or accountant with you during the whole negotiation process.
Computing the amount is very complicated.
In simple terms, your percentage share in the production cost is much bigger than the percentage share in royalty.
Your bottomline income may or may not be bigger depending on your land area and your apportionment in the proration unit, which is basically the size of property that you can touch according to the government.
You have to apply with the Railroad Commission for this.
Now, don't go around computing the amount of your share in the working interest and don't just take the word of the operator as to how much.
This is an area where you need the recommendation from your lawyer or accountant.
If you really have no money, you can still earn from your oil and gas property by negotiating for a royalty interest.
That way, the operator or buyer can drill and build wells immediately without delay.
This is least complicated way to earning money out of your property, anyway.
As you know, these things are not free.
Depending on the county where your property is located, the government can wring you dry in terms of legal costs and taxes.
Why not pass that nasty bit on to the operator and let him deal with the taxman? Remember, when you have no prior experience swimming professionally, don't wade into the water that's too deep for your own good.
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