Legal Definitions - net-profits interest

Definition: Net-profits interest is a term used in the oil and gas industry to refer to a share of production that is free of the costs of production. It is similar to a royalty, but it is only payable if there is a net profit, and the costs used to calculate the net profit are negotiated.

Example: Let's say a company owns an oil well and agrees to give a net-profits interest of 10% to an investor. If the well produces 1,000 barrels of oil and the cost of production is $50 per barrel, the total cost of production would be $50,000. If the price of oil is $60 per barrel, the revenue from the sale of the oil would be $60,000. However, the net profit would be $10,000 ($60,000 - $50,000). The investor would then receive 10% of the net profit, which would be $1,000.

Explanation: This example illustrates how a net-profits interest works. The investor receives a share of the production, but only if there is a net profit. The costs used to calculate the net profit are negotiated, so they may vary from one agreement to another.