What is a Working Interest?

A working interest is an investment in an oil and gas operation, where the investor is responsible for all costs incurred to explore, develop, and conduct production operations. The share of revenue reserved for the holder of a working interest is the residual amount after the royalty interest and nonworking interests have been subtracted.

Undivided Interest vs. Divided Interest

A working interest can be further classified into an undivided interest or a divided interest. In an undivided interest arrangement, two or more owners of a working interest share revenues and expenses in accordance with their proportional ownership interests. In a divided interest arrangement, the owners of a working interest receive revenue and pay for expenses based on their ownership of specific acreage.

Related AccountingTools Course

Oil and Gas Accounting

Working Interest vs. Nonworking Interest

A firm may no longer have an interest in maintaining a working interest in a property, perhaps because it does not have the financial or managerial expertise to explore and develop the property. If so, it can trade its working interest to another party in exchange for a nonworking interest, thereby shifting all responsibilities to the other party.

Advantages of a Working Interest

There are several advantages to having a working interest in an oil and gas property, which are as follows:

Profit potential. You can generate substantial profits when a well is successful, which may last for an extended period of time.
Decision-making. All key decisions are in the hands of the business owners, giving you better control over operations.
Tax benefits. There can be tax benefits relating to the tax deductibility of some costs, while any losses can be offset against your other income.