what is nri in oil and gas?

Here’s a quick, handy guide to calculating the net revenue for your oil and gas investments and specific net revenue interest versus working interest in a well. (Note: You don’t need to know all of this to invest with EnergyFunders, but this is how you would calculate it.)

First, though, here’s how we defined net revenue interest or NRI for oil and gas investments in our Oil and Gas Glossary:

Net Revenue Interest (NRI) — A net revenue interest (NRI) is the total revenue interest that a party owns in an oil and gas lease, well or drilling unit. For example, if ABC Oil Co. owns 100% working interest and Joe Landowner is entitled to a 12.5% royalty, then ABC Oil’s NRI is 87.5% and Joe Landowner’s NRI is 12.5%. If ABC Oil owns 50% working interest and Joe Landowner still owns 12.5% royalty, ABC Oil’s NRI is 43.75% (or, 50% reduced proportionately by Joe Landowner’s 12.5% royalty).

This is important to know. Is the well part of a drilling unit or do you have a stand-alone lease that is big enough not to need a drilling unit?

There’s also the chance that you own the minerals outright, but this question is basically the same if you do. The key question is are you a part of a drilling unit or do you control enough acres either through leasing them or owning them to drill a well without being a part of a drilling unit?

For the purposes of this post, we’re assuming that you aren’t trying to calculate your net revenue interest for oil and gas investments as a landowner. This is a post about oil and gas net revenue for the working interest owner.

Once you’ve figured out if you have a lease well or a unit well, you should next be able to figure out how much working interest you own in the well.

Working Interest — A working interest is ownership in the lease itself, including the right to drill and produce oil and/or gas. Working interest owners fully participate in the profits of a successful well and pay for all costs of drilling and operating wells, including paying royalty owners.

That’s somewhat abstract. Let’s make it real-world applicable by going straight to the following examples.

Q: If you own a lease of 100% of the minerals under 160 acres in a 640 acre drilling unit, how much working interest do you own in a well drilled in the unit? A: 25%, because the 160 acres that you control represents 25% of the land in the drilling unit.

Q: If you own a lease of 50% of the minerals under 160 acres in a 640 acre drilling unit, how much working interest do you own in a well drilled in the unit? A: 12.5%, because you control 80 net acres in the 640 acre drilling unit. (160 X 0.50) / 640 = 0.125 or 12.5%

Q: If you 1) own 100% of the minerals in 80 acres, 2) own 50% working interest in a lease of 50% of the minerals in 160 acres and 3) you own 100% of a lease of 100% of the minerals in 320 acres, all in the same 640 acre drilling unit, how much working interest do you own in a well drilled in the unit? A: 68.75% working interest. You may be thinking, “Whoa, that just got complicated fast!” True, that’s a pretty complex scenario, but oil and gas is a business where trades happen and there’s competition for valuable leases. Let’s break it down. If you own 100% of the minerals in 80 acres, that’s 80 net acres of the 640 acre drilling unit. If you own 50% working interest to a lease of 50% of the minerals in 160 acres, that’s 40 net acres of the 640 acre drilling unit. If you own 100% of a lease of 100% of the minerals in 320 acres, that’s 320 net acres of the 640 acre drilling unit. 80 + 40 + 320 = 440 net acres 440 / 640 = .6875 That gives you 68.75% working interest in the unit. Let it soak in for a minute. Great, moving on!

Remember, your net revenue interest isn’t how much you own in the well; it’s what your cut of the revenue is. Before the working interest owners can divvy up their proceeds, royalties have to be paid out first.

Typically, landowners will be owed between 12.5% and 25% of the proceeds of oil and gas drilled on their lease. Sometimes there will be overriding royalties as well owed to landmen or geologists or to a prior company that reserved them in their sale to the current company.

Here’s one easy example:

If you own a lease covering 320 acres in a 640 acre unit and you owe 25% landowner royalties, you have 37.5% net revenue. 320 is half of the 640 acre unit and you owe 25% landowner royalties on your share of the unit, so (320 / 640) X 0.75 = 0.375 or 37.5%.

Let’s do a slight modification of the last example. This will be a really complex example. But if you can do the complex examples, the easy ones will be a piece of cake.

In a 640 acre drilling unit, you own the following, which we just determined to be 68.75% working interest in the unit:

1) You own 100% of the minerals in 80 acres. You gave a non-participating royalty interest of 3% to the person who sold it to you. That means you control 100% of the executive rights to the minerals, but you owe a 3% royalty on production in those 80 acres.

2) You own 50% working interest to a lease of 50% of the minerals covering 160 acres. You owe a landowner royalty of 12.5%

3) You own 100% of a lease of 100% of the minerals in 320 acres. You owe a landowner royalty of 25%.

What is your net revenue interest in the well for your oil and gas investments?

Scroll down for the answer.

OK, here is it. The answer is you have 55.09375% oil and gas net revenue interest in the well. If you got something different, keep going at it until it makes sense. That’s the only way to learn.

Now, let’s say you have a joint operating agreement (remember that’s the agreement between working interest owners in a unit) that says that all working interest owners split royalty evenly up to 25% royalty owed on a lease.

Here's a closer look at how you calculate net revenue interest.

Royalty rights: Take them off the top Before you can calculate net revenue interest, royalty rights holders get paid first. The typical oil and gas operation leases land from landowners, agreeing to pay them a percentage of production. This amount comes right off the top.

What's your working interest? In many cases, more than one party may own an interest in the production. There are several reasons why a company or party would not hold full working interest:

After subtracting burdened rights such as royalties which come first, the remainder is divided among all the working interest owners as described above. The working interest you (or the party you're measuring it for) is what you'll use to calculate net revenue interest.

Doing the math Here's a simple example.

Let's say royalty rights are 18% of revenue, so we start by subtracting that from 100%, giving us 82%.

82% of revenue is the net revenue interest for this particular production unit. To get net revenue interest for each entity that owns a share of working interest, divide their working interest by 82%. So if a producer holds the full working interest in the production unit, its net revenue interest would be 82%.

But if, say, you had a financial backer who owned a 10% working interest while you held the other 90%, then the math changes, since you'd hold 90% of the 82% of production after royalty holders are paid. So you'd hold 90% x 82% = 73.8% of net revenue interest for that particular drilling unit.

A more complicated example

If you own a working interest in only part of a larger drilling unit, say you hold 100% working interest in 100 acres of a 300 acre drilling unit:

In this example, using the same royalty interest of 18% as above, you'd hold a 33.3% working interest in the drilling unit, of which 82% is available after royalties. So 33.3% x 82% = 27.3% net revenue interest in the 300 acre drilling unit.

This matters, because the 100 acres you personally own a working interest in may not produce at the same level of output as the full acreage of the drilling unit, but all parties share equally from production of the entire drilling unit, based on their royalty percentage and/or working interest.

NRI stands for net revenue interest, and it's important to be aware of also. It's the percentage of production revenue that an operator or investor receives, and it's calculated using working interest amount and then by deducting royalty interests.