Carried Interest

A carried interest is an arrangement in oil and gas operations where one party (the carried party) has some or all of its share of exploration, drilling, or development costs paid by another party (the carrying party). In exchange, the carried party typically receives a reduced working interest or agrees to pay back the carry from its share of production.

How a carry works: - The carrying party pays costs attributable to the carried party's interest - The carried party receives a share of production without bearing the costs (during the carry period) - The carry may be "to the casing point," "to payout," or for a specified period - After the carry period, the carried party typically bears its proportionate share of costs

Types of carries

Free carry: - The carried party never repays the carrying party - The carrying party absorbs the costs permanently - The carried party receives a free interest after earning

Carried to casing point: - The carrying party pays all costs through drilling and casing the well - The carried party must bear its share of completion and operating costs - Common in farmout agreements

Carried to payout: - The carrying party pays all costs until the well pays out (recovers costs from production) - After payout, the carried party bears its share of ongoing costs - The carrying party may receive a larger share of revenue before payout

Applications: - Farmout agreements (farmee carries farmor through drilling) - Joint ventures (one party provides capital, other provides expertise or acreage) - Promotional interests (geologists or landmen receive carried interests for prospect generation)

The specific terms of each carried interest arrangement are defined in the operating agreement or farmout agreement between the parties.