Definition - What does Carried Interest mean?
Carried Interest is one of the partnership contracts in the oil and gas industry between the two or multiple parties that have working interest on a piece of land. In carried interest type partnerships, one of the partners is carried by the other partners in a way that the other partners foot the bills for the drilling costs while the carried partner will receive his/her share of interests in the production because he/she initiated the deal.
Petropedia explains Carried Interest
Carried interest work is explained in a simple way below.
Consider a working interest owner A (Party A) forms a Limited Liability Company (LLC) and acquires acreage on a piece of land. Party A gathers two more working interest owners Party B and C and convinces them to invest one million dollar each towards drilling cost of a well. Let’s assume that the cost of drilling a well comes up to be $ 3 million. After well is drilled, each party has 25% of net income from the well. However, since Party A formed the Limited Liability Company and put together the complete deal, he receives the complete 25% interest for his services, while the Party B and C paid one third of the drilling cost in order to receive 25% of revenue interest. This type of deal is referred as carrying interest or “Third for a Quarter”.