Fundamentals of Oil & Gas Accounting 5th Edition by Rebecca Gallun, Charlotte Wright

Exercise 19

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.