Net Revenue Interest (NRI)
For any given project, regardless of how the income is ultimately distributed to the investors, production is broken down into gross and net revenue. Gross revenue is simply the number of barrels of oil or cubic feet of gas per day that are produced, while net revenue subtracts both the royalties paid to the landowners and the severance tax on minerals that is assessed by most states. This tax generally ranges from 2-8%. The value of a royalty or working interest in a project is generally quantified as a multiple of the number of barrels of oil or cubic feet of gas produced each day. For example, if a project is producing 100 barrels of oil per day and the going market rate is $85.68 per barrel (this number varies constantly according to a variety of factors), then the wholesale cost of the project will be $8,500.
Now assume that the price of oil is $100 a barrel, severance taxes are 7.5% and the net revenue interest (the working interest percentage received after royalties have been paid) is 80%. The wells are currently pumping out 100 barrels of oil per day, which comes to $10,000 per day of gross production. Multiply this by 30 days (the number usually used to compute monthly production), and the project is posting gross revenue of $300,000 per month. Then, to compute net revenue, we subtract 20% of $300,000, which brings us to $240,000.
Then the severance tax is paid, which will be 7.5% of $240,000. (Landowners must pay this tax on their royalty income as well.) This brings the net revenue to about $222,000 per month, or about $2,664,000 per year. But all operating expenses plus any additional drilling costs must be paid out of this income as well. As a result, the project owner(s)/investors may receive $1,720,000 in income from the project per year, assuming no new wells are drilled. Of course, if new wells are drilled, they will provide a substantial tax deduction plus additional production for the project if it is a multi-well package.
We are available to answer any further questions about oil and gas or what it means to invest in oil and gas. Please feel free to contact us directly at (972) 661-8555 or email us at firstname.lastname@example.org. “Thank you for taking the time to get to know us, and we look forward to start drilling with you soon!” Matt Griffin - CEO of Payson Petroleum