Identify the types of interests that are created in the following situations. If the interest is an


Identify the types of interests that are created in the following situations. If the interest is an overriding royalty or a production payment interest, also state whether it is a retained or carved-out interest.

a. Zeke Company owns the working interest in a proved property with net capitalized costs of \($100,000\). Zeke sold the lease for \($250,000\) cash and a payment of \($150,000\), plus interest of 10% to be paid out of the first 60% of the oil produced.

b. Wildcat Oil Company acquired an undeveloped lease for which it paid $30,000.

Financially unable to develop the lease, Wildcat agreed to allow Friendly Company to earn a 30% working interest by paying 100% of the cost of drilling and completing a well.

c. Young Oil Company owns a 100% WI in Lease A, which has a 1/8 royalty interest.

On February 1, 2013, Young carved out a \($400,000\) payment, payable out of 60% of the net proceeds of the working interest’s share of production, plus interest of 10%

on the unpaid balance.

d. Four companies own adjacent leases that share a common reservoir. The companies decide to operate the properties as one in order to obtain improved operating efficiency. Following negotiations by engineers, geologists, and others, the companies agree upon participation factors and market values of contributed IDC and equipment.

e. Mabel Oil Company acquired an unproved property at a cost of \($50,000\). Mabel later sold the working interest and kept a nonworking interest. As a result, Mabel will receive 1/16th of the revenue of the working interest from which the interest was created.

f. Company ABC assigned a 40% WI in an unproved property to Company XYZ in return for Company XYZ bearing all costs of drilling, developing, and operating the property. Company XYZ is entitled to all of the revenue from production (net of royalty) until Company XYZ has recovered all of its costs, at which time the property becomes a joint working interest.

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Fundamentals Of Oil And Gas Accounting

ISBN: 9781593701376

5th Edition

Authors: Charlotte J. Wright, Rebecca A. Gallun

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