Oil & Gas Accounting 101 – Division of Interests

 

The percentages that determine the amounts paid to the different people or entities participating in the well is called the Division of Interests or Division Order. The division order is a document spelling out what the Division_orderowners in the well are to be paid and when.

The interests (percentages) that make up the division of interests are typically determined in the following manner:

Royalty Owners – paid the percentage their land makes up of the entire drilling unit. If they own 100% of the land the well is drilled on they would typically get a 12.5% royalty.

Overriding Royalty Owners – typically paid around 3%.

Working Interest Owners – pay their share of the expenses based on the amount they invested in the well. If they put up 50% of the cost of the well, they would get a 50% working interest. The working interest owner’s share of the revenue is determined by first subtracting the royalties paid from 100 and then multiplying the remainder by their working interest.

Example:
Assume a well has a 12.5% royalty and an overriding royalty of 3.0%. The royalties are paid first so this would leave 84.5% for the working interest owners.

100.0% – 12.5% – 3.0% = 84.5%

Owner Type Expense Pct Revenue Pct
Royalty 12.500%
Overriding Royalty 3.000%
Working Int 1 75.00% * 84.50% = 63.375%
Working Int 2 25.00% * 84.50% = 21.125%
Totals 100.000% 100.000%

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Source: SherWare Blog

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