Legal Definitions - operating interest

An operating interest, also commonly known as a working interest, refers to a type of property interest, primarily in the context of oil and gas law. It grants the holder the right to explore for, develop, and produce oil, gas, and other minerals from a specific tract of land. Crucially, it also carries the significant obligation to pay a share of the costs associated with these activities, including exploration, drilling, production, and ongoing operational expenses. In return for bearing these costs and responsibilities, the holder of an operating interest receives a share of the minerals produced, after any royalties due to the mineral rights owner have been paid. The operating interest holder is typically the party responsible for managing and conducting the actual drilling and production operations, or for overseeing them.

Here are some examples illustrating an operating interest:

• Example 1: New Offshore Drilling Project

  A major energy corporation, "Oceanic Energy Inc.," secures a lease from the government to explore and drill for oil in a newly designated offshore block. Oceanic Energy Inc. holds the operating interest in this block. This means they have the right to conduct seismic surveys, drill exploratory wells, and eventually set up production platforms. However, they are also solely responsible for funding all the associated costs, such as geological studies, drilling equipment, environmental compliance, and personnel wages. If they discover oil, they will receive the majority of the revenue from its sale, after paying royalties to the government as the mineral rights owner.

• Example 2: Joint Venture in an Existing Field

  Two smaller independent oil companies, "Prairie Petroleum" and "Desert Drills," decide to form a joint venture to revitalize an aging oil field. Prairie Petroleum, with its specialized expertise in enhanced oil recovery techniques, takes on the operating interest for the project. This arrangement means Prairie Petroleum will be responsible for managing the day-to-day operations, hiring contractors, purchasing equipment, and bearing the initial capital expenditures for the new recovery methods. Desert Drills, while contributing capital, holds a non-operating working interest. Both companies will share in the production revenue according to their agreed-upon percentages, but Prairie Petroleum bears the direct operational burden and decision-making authority for the field's activities.

• Example 3: Sale of an Operating Interest

  A small exploration company, "Frontier Finds," successfully drills an exploratory well and confirms a significant natural gas reserve. However, Frontier Finds lacks the capital and infrastructure to develop the field to its full potential. They decide to sell their operating interest in the gas field to a larger production company, "MegaGas Corp." Upon the sale, MegaGas Corp. acquires the rights to develop and produce the gas, but also assumes all future obligations and costs associated with building pipelines, processing plants, and ongoing maintenance. Frontier Finds might retain a smaller, non-operating interest or a royalty interest, but MegaGas Corp. now holds the primary responsibility for the field's operations and expenses.