Working Interests
Candlefocus EditorWorking interests involve active participation in the project. This means that investors are liable for any associated costs that arise during the project, as well as any profit or loss realized. Unlike royalty interests, where the investor does not need to take part in managing the day-to-day operations of the project, the investor in a working interest is actively involved in the project and has some control over it.
The risks associated with a working interest are high. The investor must be prepared to take on the risk of volatility in oil prices, as well as uncertain output levels, both of which can have a huge impact on the project’s success or failure. Moreover, the investor will be responsible for any costs associated with the project, which can include costs for drilling and completion, well servicing, costs for leasing and financing, and so on. The investor may incur costs even if the well produces no output, typically known as dry hole costs.
Despite these potential risks, there are certain tax benefits associated with working interests. Investors are allowed to deduct any costs and losses associated with the project from their tax returns, as well as certain costs related to depreciating assets. This can make the investment more attractive for taxpayers looking for ways to reduce their total tax bill.
Ultimately, a working interest is an extremely high-risk form of investment. While its associated costs and risks can be significant, it can also be extremely lucrative if successful. Potential investors should understand the risks of such an investment before deciding to pursue it.