Carried Interest
A working interest whose share of drilling or operating costs is paid by another party, which recovers that money out of production before the carried party shares in it.
Detailed Definition
A carried interest is an arrangement in which one party pays another party's share of the costs of drilling or operating, and recovers that money out of production. The U.S. Bureau of Mines Dictionary of Mining, Mineral, and Related Terms (1968) lists "carried interest; revisionary interest" and defines it as "A working interest participation in producing property whereby the operator is reimbursed his investment out of oil before the recipient receives a percentage share of net income."
A contract term, not a statutory one
No federal statute or BLM regulation read for this entry defines a carried interest. The term shows up in federal accounting rules as one example of a drilling arrangement: the SEC's rule on oil and gas accounting refers to "various other forms of drilling arrangements involving oil and gas exploration and development activities (e.g., carried interest, turnkey wells, management fees, etc.)" (17 CFR 210.4-10). What is carried, for how long, and what happens after the carrying party is repaid all depend on the agreement that creates the carry.
State pooling statutes that address an owner who does not pay
Some state conservation statutes deal with an owner in a pooled unit who does not pay a share of the well costs. They are not called carried interests in those statutes, but they answer the same question of who pays and how the payer is repaid.
- North Dakota. N.D.C.C. 38-08-08(3) provides that "if the owner of an interest in a spacing unit elects not to participate in the risk and cost of drilling a well thereon, the owner paying for the nonparticipating owner's share of the drilling and operation of a well may recover from the nonparticipating owner a risk penalty." For an interest under a lease, the penalty "is two hundred percent of the nonparticipating owner's share of the reasonable actual costs of drilling and completing the well and may be recovered out of, and only out of, production." For an unleased interest it is fifty percent.
- Oklahoma. Under 52 O.S. 87.1(e), the Corporation Commission may provide that the owner "drilling, or paying for the drilling, or for the operation of a well for the benefit of all shall be entitled to production from such well which would be received by the owner or owners for whose benefit the well was drilled or operated, after payment of royalty," until paid.
Why it matters in mineral title research
- A carried interest is recorded, if at all, in an operating agreement, a farmout, or an assignment. The recorded instrument may state only the ultimate interest, not the carry, so the agreement itself has to be located.
- The point at which the carry is recovered changes the revenue split, so the net revenue interest before and after recovery has to be stated separately (see Net Revenue Interest).
- In a force-pooled unit, the pooling order, not a private contract, may govern recovery of costs from a nonparticipating owner (see Pooling).
Related Terms
Mineral Lease
A contract by which the owner of minerals grants another the right to explore for and produce them for a stated term, in exchange for payments such as bonus, rental, and royalty.
Working Interest
The interest in an oil and gas lease that carries the right to explore, drill, and produce, together with the obligation to pay the costs of those operations.
Overriding Royalty Interest
A share of production carved out of the lessee's interest in a lease, in addition to the royalty reserved to the lessor, and free of the costs of production.
Farmout Agreement
An agreement by which a lease owner (the farmor) agrees to assign all or part of its interest to another party (the farmee), which earns the assignment by drilling or meeting other conditions.
Net Revenue Interest
The share of production, or its proceeds, that a working interest owner actually receives after royalty, overriding royalty, and other burdens on production are deducted.