The cost in revenues from an oil and gas well are not shared equally. Under the simplest of the mineral leases, there are two parties. One is the mineral rights owner. The other is referred to as the working interest owner. The working interest owner leases the mineral rights from the mineral rights owner. In return, the mineral rights owner receives,among other forms of compensation a royalty on the sale of any oil, and/or gas produced from the mineral estate by the working interest owner. This royalty is cost free. Meaning that the mineral rights owner does not have to contribute toward any of the cost to drill, complete, and or operate a well. The cost are the responsibility of the working interest owner. So when considering the costs and revenues over the life of a well, whether it produces or not, all costs are borne by the working interest owner. All revenues on the other hand are shared between the working interest donor and the royalty owner. If there are any additional burdens on the lease, a fraction of the revenues are also directed towards these burdens. Lease burdens are additional revenue obligations to other parties that may be involved in the lease structure. A common example is an overriding royalty interest. This is created for example when the first working interest owner passes their lease on to a second working interest owner. The second owner takes over the privileges and responsibilities of the original lease. In return, they provide among other possible forms of compensation a cost free royalty that will be paid to the first working interest owner from any oil and gas revenues that they produce. Note that this second overriding royalty is in addition to the royalty that the second working interest owner must pay the mineral rights owner. Lease structures can go on to be far more complicated than this. They often involve multiple mineral rights owners, because the state mandated acreage requirements to drill a well often span more than one mineral estate. And the leases can involve multiple overriding royalty interest owners. And other types of burdens as well as involve multiple working interest owner in order to entice investors to pool enough money to drill a prospect. So how much of the revenues from an oil and gas well does a working interest owner ultimately receive? Consider this simple example in which the working interest owner of a producing well owes a royalty to the mineral rights owner, and an overriding royalty to a second interest owner. The gross revenues from the well are a 100% of the sales of oil and gas produced from the well. From these, the mineral rights owner is paid their royalty, which is commonly about an eighth, or 12 and a half percent of the revenues. The overriding royalty interest is also paid. Which in this example, say, is 10%. That leaves the net revenues from the well at 77 and a half percent of the gross revenues. From these, the working interest owner must pay a series of taxes on their produced oil and gas. These taxes include a state production or severance tax which varies from state to state and can range from nothing to as much as 15% of the gross production sales. The average being 7%. And if one of the interest holders is considered a outside of the United States, the working interest owner will need to pay a federal withholding tax on their interest payments to that interest holder. There's also local taxes as these taxes can vary and because they are generally assessed on other things than net income, I've indicated their impact on income simply as X, Y, and Z percent. The taxes can be reduced by tax deductions for qualifying well expenses and capital expenditures. Again, because the deductions are highly variable, I've indicated their impact on net income as A percent. The remaining fraction of revenue then becomes the net operating income that the working interest owner uses to cover their operation costs. Whatever is leftover after these costs have been paid is the company's net profits.
