This Month’s Topic:
Calculating Beneficial Interests (explainer video)
Beneficial Interests is a way to calculate working interests in a JOA or pooled unit when there are unequal burdens on individual leases. That is, some leases have a lower royalty rate and others have a higher royalty rate.
In a typical JOA or pooled unit, the formula for determining the working interest of an owner is to take the number of lease acres contributing to the unit and divide it by the total number of acres in the unit.
Standard Formula: number of lease acres contributing to the unit/total number of acres in the unit.
So, if Party A and Party B each own 80 acres in a 160 acre unit, both parties would own a 50% working interest (80/160).
HOWEVER, suppose Party A has a 1/8 royalty rate in its lease and Party B has a 1/4 royalty rate in its lease. The standard formula doesn’t take into account the impact of these royalties and thus A is not rewarded for having a lower royalty rate nor is B penalized for having a higher royalty rate.
The solution: beneficial interests. To calculate beneficial interests, we first have to convert the acres in the lease and in the unit into “net revenue acres.”
Beneficial Interests Formula: number of lease acres x the Party’s net revenue interest in the lease = net revenue acres.
Then, the net revenue acres are divided by the total unit revenue acres to determine the beneficial interest.
For a full explanation, I’ve prepared a YouTube tutorial to better explain the approach.
- This is a 13-minute illustrated video where I’m calculating each owner’s working interest in real time and with hand illustrations so you can follow along. (No comments please on my handwriting skills.)
- Spoiler alert: our 50/50 split based on acres and is actually a 54/46 split based on royalty rates with our beneficial interest model.
It’s been so complicated historically, but has such a real impact; it’s worth learning and using. Please feel free to share with anyone that might find it helpful.
PLM: Federal Laws that Impact Land Ownership
The Federal government owns approximately 1/3 of the total land mass in the US. In this modules, we cover the laws, procedures and impact to work on Federal land including tax shelters, incentives and other options to support our natural resources. Course objectives include:
- How to lease onshore/offshore Federal properties
- Purpose and creation of Federal units
- Environmental laws that impact drilling and development
- Tax incentives for oil and gas development
The oil and gas industry uses many unique contractual arrangements to explore for, develop, produce and market oil and gas. Land professionals must understand the most widely used contracts, including:
- Area of mutual interest
- Farm-in/farm-out
- Trades and promotes
- Support
- Joint operating
This module also focuses on the critical role of assignments that occur as a result of joint operating agreements.
PLM Module 6: Federal and State Laws that Impact Land Ownership begins March 2nd.