Working Interest is a type of ownership in oil and gas leases. Owners of working interests are responsible for the costs of exploration, extraction and production, and receive a commesurate share of profits. This is a more involved form of ownership than a royalty trust, which will not incur any production costs, but also receives limited profits from the royalty rights. Working interests generally receive favorable tax treatment and generous tax breaks, and investors typically participate as limited partners.

Q. So, this is not related to the unemployment rate, eh?
A. Nope, not the same as an interest in working. It’s refers to, a kind of ownership in an oil and gas lease. Owners of working interests are responsible for the costs of exploration, drilling, and production. And, of course, that gives them a share of the profits that result. So, essentially, you’re a real part owner of the project.

Q. So, how does this compare to royalty interest, say investing in a royalty trust?
A. When you buy a royalty, you’are out of pocket is limited to the cost buying the royalty rights… naturally, that limits the profits, too. Holders of a working interest have a couple things going for them: bigger economic upside, and tons of tax breaks. They get to deduct huge chunks of expenses upfront, and also have the income considered “active”, making any losses deductible, too.

Q. So how do people normally invest?
A. Typically through private placements of limited partnership interests. So, to accredited investors only. Of course, partnerships pass through the tax benefits, so you’ll still get those, just like you would with a direct investment. If you’re new to the game, make sure to be purchasing through a reputable broker dealer and get some expert advice. Definitely need to do some homework, but, on the other hand, if you’re really looking for an investment with some upside potential, these are worth some consideration.

Q. Are there other ways to invest, for non-accredited investors?
A. Yes, there are some mutual funds that specialize in the area. There are also a couple of publically traded finance companies out there — one that’s managed by KKR, for example — that hold substantial interests in natural resources via working interests. These are interesting ways to play the commodity and energy game, but do not pass through the tax benefits and do not have the same upside potential, as investing through a partnership structure that owns working interests.