Net Revenue Interest
Definition - What does Net Revenue Interest mean?
Net Revenue Interest is the revenue earned after burdens such as royalty interests and overriding royalty interest have debited from the working interest. Once, oil is produced from a lease, any burdens such as payments of royalty and overriding royalties are deducted from the working interest of the operator and the left over percentage production share which each party receives is the net revenue interest.
Petropedia explains Net Revenue Interest
Any operator who operates the oil and gas well over a permitted lease will hold a working interest in it and when the production starts, the operator needs to make payments for the royalty interests and overriding royalty interests to mineral interest owners. When these payments are deducted from the working interests of an operator, the operator is left with the net revenue.
The following are the simple four steps used to calculate the Net Revenue Interest:
- In this business, total revenue is represented by 100% revenues a well generates.
- Calculate the percentage share of royalty interest owners on a lease where wells have been drilled and started producing oil by adding the percentage ownership of mineral interests.
- Calculate total royalty interest by subtracting the total percentage share of royalty interest owners share from 100%.
- The remaining shares will be the net revenue interest.
The above steps are explained with the help of the example below:
Let us assume three royalty interest owners out of which one have 15% royalty interest ownership and two have overriding royalty ownership of 1.5% each. Thus, the total percentage share of royalty interest owners will be 18% (15% + 1.5% + 1.5%).
Now, we know that total revenue is represented by 100% revenues a well generate.
Therefore, total royalty interest = 100% - 18% = 82%
Let us also assume that two operators (A and B) operate on a lease with A having 75% working interests and B having 25% working interest.
So the net revenue interest that A will earn = 75% x 82% = 61.5%And B will earn a net revenue of 25% x 82% = 20.5%