One must first understand that wells are treated as individual business units and as such are funded or purchased as Working Interests (WI) that represent a percentage of ownership. Therefore, 100% of WI pays for all well costs including the costs to bring a well into production and additionally all costs of continuing well operations. Costs are assessed proportionately among the business, or well, owners according to the amount of Working Interest owned.

Likewise, revenue from well production, which is distributed monthly, is paid to the business owners proportionately according to the Working Interest owned. However, there is a significant caveat. Royalties to the property owner(s), including sometimes a much smaller percentage going to the generating geologist, are paid out of the gross production revenue, i.e. before operating expenses are subtracted. Royalties usually amount to a 20-30% reduction in the income received by the Working Interest owners. Thus, for purposes of income distribution, Working Interests are converted to Net Return Interests (NRI). For most wells the NRI will will fall between 70% to 80%.

BASIC WELL REVENUE CALCULATION FORMULA:

Net Revenue for 1 % WI = I (Gross Revenue) Xs (NRI)) – I (Operating Expenses)+ (Taxes))/ 100
Gross Revenue = { (monthly natural gas production) Xs (price per mcf) + (monthly oil production) Xs (price per barrel)}
Example, Doberman Offset Well – Jun07 Production

Jun07 Natural Gas Production= 272,253mcf@ $7.90/mcf = $2,150,799.04
2, 195mcf@ $9.47 /mcf = $20,783.75
Jun07 Crude Oil Production = 5, 727bbls@ $68.25/bbl.     = $390,886.71

$2,562,469.49

Jun07 Operating Expenses+ Taxes = $175,818.61
Net Revenue for 1 % WI= I ( $2,562,469.49 Xs. 725NRI) – $175,818.61}/100 = $16,819.72
Total Well Cost= $9,333,223
% Net ROI From Jun07 Production = $16,819. 72/$93,332.23 = 18.0%

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