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.

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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 and Disadvantages of a Working Interest

The main advantages of a working interest are that a business can generate substantial profits when a well is successful, and that all key decisions are in the hands of the business owners. The main downside is the much greater risk of loss if a well turns out to be dry or have little output.