Net Revenue Interest, commonly shortened to NRI, is the final number computed when determining a interest holder’s share of the proceeds (or costs) from a well; this is the number shown on Division Orders. Over time this has become a more and more complex equation, factoring in burdens, ORRI, multiple tracts, single interests being divided (such as by heirs), etc. My goal here is to give you the simplest formulas for calculating the NRI for Working Interest Partners and Royalty Interest Owners.
First, some definitions (thank you Schlumberger for use of your Oilfield Glossary, http://www.glossary.oilfield.slb.com/).
Lease: A contract between mineral owner, otherwise known as the lessor and a company or working interest owner, otherwise known as the lessee in which the lessor grants the lessee the right to explore, drill and produce oil, gas and other minerals for a specified primary term and as long thereafter as oil, gas or other minerals are being produced in paying quantities. This lease gives the lessee a working interest. The oil and gas lease is granted in exchange for royalty payments to the lessor.
Mineral Interest: Ownership of the right to exploit, mine or produce all minerals lying beneath the surface of a property. In this case, minerals include all hydrocarbons. Mineral interests include: 1. the right to use as much of the surface as is reasonably necessary to access the minerals, 2. the right to execute any conveyances of mineral rights, 3. the right to receive bonus consideration, 4. the right to receive delay rentals and 5. the right to receive royalty. Any or all of the above five rights of mineral ownership may be conveyed by the mineral owner.
Working Interest: A percentage of ownership in an oil and gas lease granting its owner the right to explore, drill and produce oil and gas from a tract of property. Working interest owners are obligated to pay a corresponding percentage of the cost of leasing, drilling, producing and operating a well or unit. After royalties are paid, the working interest also entitles its owner to share in production revenues with other working interest owners, based on the percentage of working interest owned.
Royalty Interest: Ownership of a percentage of production or production revenues, produced from leased acreage. The owner of this share of production does not bear any of the cost of exploration, drilling, producing, operating, marketing or any other expense associated with drilling and producing an oil and gas well.
Spacing Unit: An area allotted to a well by regulations or field rules issued by a governmental authority having jurisdiction for the drilling and production of a well.
Tract: A piece of land describable by a cohesive legal description whose mineral interest totals 100%.
For a Working Interest Partner
(WI *Tract Net AC / Unit AC) – (WI * Roy* Tract Net AC / Unit AC ) = NRI
So, the first part is the Working Interest percentage in decimal form (so 100% is “1”, if 1, do not bother multiplying by it) TIMES the tract acreage DIVIDED BY the unit acreage. The second part is where you figure out the burden from the royalty given in the lease, Working Interest (again, in decimal) TIMES the royalty (either in decimal or fraction form) TIMES the tract acreage DIVIDED BY the unit acreage. Then subtract the second part from the first part.
Let’s use some real numbers:
A company took a lease and now has a 50% working interest in a tract. This tract lies within a spacing unit for a well. The spacing unit it 1,280 acres, the tract is 160 acres. The mineral owner being leased owns 10% of the 160 acres, so 16 acres, and was leased with a 17.5% royalty. Everybody following so far? Great.
(0.5 * 16 / 1280) – (0.5 * .175 * 16 / 1280) = 0.05156250
You can see how it would get more complex the more leases taken. Though, you could reduce the equation some more this some by combining all tracts with the same royalty.
For a Royalty Owner
Net AC * Roy / Unit AC
Using that same example: 16 * .175 / 1280 = 0.00218750
When you get more advanced with it you will need to know a few more terms too.
Overriding Royalty Interest: Ownership in a percentage of production or production revenues, free of the cost of production, created by the lessee, company and/or working interest owner and paid by the lessee, company and/or working interest owner out of revenue from the well.
Nonparticipating Royalty Interest: Ownership in a share of production, paid to an owner who does not share in the right to explore or develop a lease, or receive bonus or rental payments. It is free of the cost of production, and is deducted from the royalty interest.
Payout: The point at which all costs of leasing, exploring, drilling and operating have been recovered from production of a well or wells as defined by contractual agreement.