Last Updated on Oil and gas investments are a lucrative business. However, there is a need to understand several terms, including Net Revenue Interest (NRI). Often, the costs of getting access to a tract of land that has oil and gas are significantly lower than the cost associated with developing it.
As a result, the rights to explore and exploit the resources beneath the surface are often leased to oil and gas companies (working interest owners) by landowners in exchange for receiving a share of the revenue generated by the oil or gas sold.
For this reason, they have no need to incur costs related to production, yet they can enjoy a fraction of the profit from the oil and gas on their property. With this in mind, this comprehensive guide looks at all you need to know about Net Revenue Interest NRI. Keep on reading!
What is Net Revenue Interest in Oil and Gas?
NRI is the portion of production remaining after deducting related burdens (e.g., oil and gas royalties or overriding royalties) from any working interest held. In simple terms, it is the actual share of oil/gas production interested parties receive after all relevant deductions have been applied. The importance of NRI cannot be ignored. After all, this represents the amount of payment you must be paid.
Simply put, NRI represents the total revenue interest controlled by an entity in a specific oil or gas production unit, including a well, lease, or drilling unit. When there are various parties involved in a drilling lease, it can become quite complex. This might include multiple mineral and royalty rights holders who receive numerous royalty percentages and many entities with a working interest in parts of the drilling unit.
How to calculate net revenue interest?
Landowners are often regarded as royalty owners in this kind of transaction. A percentage of the total oil/gas revenue is paid to them without necessarily sharing any responsibility for the operational costs.
An oil and gas company – also regarded as the working interest owner – is responsible for all the operational expenses. They also receive a portion of the revenue once the share of the royalty owners has been paid.
Essential key terms cannot be ignored. Some of these are explained as follows:
Net Mineral Acres (NMA)
The Net mineral acres are the number of acres owned out of the total gross acres, a portion owned out of the gross tract acreage. The NMA represents the portion landowners control, as the total gross acreage may be split among numerous parties. As a result, it is fundamental in deriving the amount that royalty owners are paid.
Drilling Spacing Unit (DSU)
The Drilling Space Unit represents a specific acreage area that can be used to drill a well. The size of the drilling unit is based on the spacing rules and the well densities under the field rules of the particular jurisdiction.
you might wonder how big your Drilling Spacing Unit is
This often represents the final item that must be known. This information is readily available on the state’s Oil and Gas Division Commission Website.
Now, what is the formula to calculate NRI?
Before you can calculate gas revenue (or oil revenue), it is important to be acquainted with the number of Net Mineral Acres you own and the Drilling Spacing Unit (DSU) size, as well as the royalty stated in your agreement. These variables are often easy to figure out.
Besides this, you must determine if the royalty is a Non-Participating Royalty Interest (NPRI). To determine if an NPRI currently exists requires you to perform a mineral rights title search. This helps clarify the history of the specific property and if an NPRI was previously carved out or not.
There is a general formula to determine the value of Net Revenue Interest.
NRI = NMA / DSU * Royalty
The key variables include:
- Net Mineral Acres
- Drilling Spacing Unit Acres
- Royalty Rate
Let’s explain more with the use of an example:
There are 650 gross acres on a particular section of land. Assume you are a mineral rights owner and control a 1/32 interest in the tract of land.
Furthermore, the decimal interest is 0.03125. If so, then:
The Net Mineral Acres (NMA) are calculated as follows:
NMA = 650 x 0.03125 = 20.31 net acres.
You can find out the decimal interest by hiring a landman or lawyer to do a property Title Search. They can conduct a search of the local county records while noting every change in ownership status made over time. There will also be a report indicating the decimal interest of the owner and the estimated net acres.
There will also be a list of any NPRIs that the mineral interest has been subject to.
Calculate the Total Royalty Interest
Two types of royalty owners exist, a royalty interest owner and an overriding royalty owner. The former owns the mineral rights. The latter can be any other third parties, including geologists, consultants, or financial backers whose interest is not altered by the operational costs.
If you wish to calculate NRI, the first step is to add up the percentage interest ownership of each of these royalty owners.
Take, for example, three royalty owners.
The first person is the royalty interest owner, who holds a 15% share. The second and third each own 1.5% overriding royalty interests.
As a result, total royalty interests will stand at 18%.
Deduct Total Royalty Interests From Total Revenues
The total is the entirety of the revenues that a well generates. Only after the royalty owners have taken their interests can the working interest owners receive their calculated interests.
Determining the estimation of the net revenue interest requires that the total royalty interest is deducted from 100 percent.
From the previous example, the total royalty interest is 82 percent.
Calculate Net Revenue Interest
Each working interest owner (for instance, an oil and gas company) receives a percentage of the interest left once the royalty owners receive their percentage shares. To estimate the net revenue interest of each owner, multiply the percentage ownership by the result of the previous calculation.
If the two working interest owners have a working interest of 80% and 20%, respectively:
The former’s net revenue becomes 80% multiplied by 82%, which results in 65.6%.
On the other hand, the net revenue of the second owner would be 20% multiplied by 82%, which results in 16.4%.
From the above explanations, let’s say that the following information was provided so that we can calculate net revenue interest:
- NMA = 20.31 Acres
- DSU Size = 1250 Acres
- Royalty = 17%
- Now, the NRI becomes 20.31 / 1250 * 0.17 = 0.00276216
So, the revenue to be paid is 0.276216% of the total received from selling oil and gas.
Conclusion
The oil and gas business can be very lucrative, especially if you are a mineral interest owner. This implies you can exploit the mineral resources beneath the surface of your land. But you must understand key industry-related terms, such as Net Revenue Interest (NRI).
The NRI represents the share of total revenue interest a party owns in a drilling unit, well, or oil and gas lease.
Knowing how to calculate this will ensure that each party can easily estimate how much they are paid. In this guide, we defined what the Net Revenue Interest is, as well as the steps and formulas that are required for estimating it. Besides this, you can also seek the service of a landman or attorney for informed advice.
FAQs
What is the difference between working interest and net revenue interest?
The difference between the Net Revenue Interest and Working Interest is simple: While the NRI is the income, the Working Interest is the expenses.
What is the difference between NRI and Gross Owner Interest (GOI)?
Net Revenue Interest is the portion of an oil and gas leaseholder’s interest in production that they are entitled to receive as part of their lease. The amount is calculated after deducting all royalty payments, production costs, and other fees.
Gross Owner Interest refers to the total amount a leaseholder is entitled to receive from their leasehold interest before any deductions are made.
Both NRI ad GOI are essential concepts in oil and gas leases, as they allow owners to understand how much of the profits produced on their land will be received by them.
Another difference between NRI and GOI is how each type of ownership is treated for taxation purposes. NRI may be subject to income tax, whereas GOI is subject to capital gains tax. This distinction is crucial for leaseholders to understand when deciding the type of ownership they should choose.
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