Working Interest vs. Mineral Interest

Two Types Of Ownership

There are two types of ownership in oil and gas exploration and production. An investor can choose when investing in the oil and gas industry to participate as a working interest, or mineral interest owner. Working interest owns a percentage of ownership in a lease that grants its owner the right to explore, drill and produce oil and gas from a piece of property. A mineral interest has ownership of real property which gives the owner the right to exploit, mine, and/or produce any or all of the minerals lying below the surface of the property

Duration of Interest

Working Interest

Limited to terms set forth in the lease agreement between mineral owner and working interest owner. Typically terminates due to inactivity before lease term expiration, or after a well is no longer economically producing.

Mineral Interest

Minerals can be owned in perpetuity, like any form of real estate. Nevertheless, States such as Louisiana use the Napoleonic Law System that enforce the mineral rights to revert back to the original owner.

EXPLORATION AND PRODUCTION COST

Working Interest

Working interest owners are responsible for all exploration costs such as labor, engineering, overhead, rig costs, transportation, casing, and other tangibles, as well as plugging and abandonment.

Mineral Interest

Minerals can be owned in perpetuity, like any form of real estate. Nevertheless, States such as Louisiana use the Napoleonic Law System that enforce the mineral rights to revert back to the original owner.

TAX BENEFITS

Working Interest

With the U.S. government backing domestic energy production there are significant advantages to oil investments. Intangible drilling costs, which generally constitute 65%-80% of the total drilling cost, is 100% deductible in the year incurred. Tangible drilling costs are also 100% deductible, but must be depreciated of seven (7) years. Also, any income generated through working interest is considered active income and can be offset against other forms of income (wages, interest, and capital gains).

Mineral Interest

Royalty interest owners receive their share of the well “off the top” of the gross revenue generated. They do not share any liabilities on the lease or well, but also are not eligible to any tax benefits received by working interest owners. All income is treated as ordinary income, and is taxed at the individuals tax rate.

ASSIGNABLE INTEREST

Working Interest

With the U.S. government backing domestic energy production there are significant advantages to oil investments. Intangible drilling costs, which generally constitute 65%-80% of the total drilling cost, is 100% deductible in the year incurred. Tangible drilling costs are also 100% deductible, but must be depreciated of seven (7) years. Also, any income generated through working interest is considered active income and can be offset against other forms of income (wages, interest, and capital gains).

Mineral Interest

Royalty interest owners receive their share of the well “off the top” of the gross revenue generated. They do not share any liabilities on the lease or well, but also are not eligible to any tax benefits received by working interest owners. All income is treated as ordinary income, and is taxed at the individuals tax rate.

IN CONCLUSION

Both working interest and mineral interest have different pros and cons for individual investors and need to be evaluated based on the individual needs and financial situation of an investor.

 

Mineral rights are real property and is freely assignable or divisible. This means oil and gas mineral interest is transferable, in whole or in part by the mineral owner.

Contributor: Troy W. Eckard

Contributor: Troy W. Eckard

Troy W. Eckard has over three decades of energy expertise. Troy has been investing in tangible asset since 1985, and built multiple companies focused on aggregating, maturating, and liquidating investment opportunities.​ He's the longest World MoneyShow attendee, and is striving to continue his presence to inform and educate investors on tangible assets.

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