A producing well turns barrels into dollars every month, but the path from the wellhead to your bank account passes through several hands and several deductions. Understanding that waterfall is the difference between reading a revenue check and being surprised by one.
The basic equation
At its simplest, the gross revenue a well generates in a month is the volume of each product sold multiplied by its net price. A well that produces 3,000 barrels of oil in a month, sold at a net $70 per barrel, generates $210,000 of gross oil revenue, plus whatever its gas and natural gas liquids fetch. That gross figure is the top of the waterfall, and almost nobody receives the gross.
The revenue waterfall
From gross revenue, deductions and shares are taken out in a defined order before money reaches a working-interest owner:
- 1Royalties: the mineral owners' cost-free share comes off the top first. If the combined royalty burden is 25%, then 25 cents of every revenue dollar is gone before costs are even considered.
- 2Severance & production taxes: states tax the value or volume of hydrocarbons produced. This is typically a few percent of revenue.
- 3Lease operating expenses (LOE), the recurring cost of running the well: pumping, electricity, maintenance, water disposal, field labor. Working-interest owners share these in proportion to their interest.
- 4Net revenue to working interest, what remains is split among working-interest owners according to their net revenue interest, and that is what shows up on the monthly check.
A royalty owner only sees the top two lines. They get their share of revenue minus their share of severance tax, and they never pay LOE. A working-interest owner absorbs operating costs, so in a low-price month with high expenses, the same well can pay a royalty owner nicely while paying a working-interest owner almost nothing.
Decline: the income shrinks
The single most important dynamic in oil and gas income is decline. A well produces the most in its first months and tapers from there. Shale wells are notorious for steep early decline, sometimes losing 60–70% of their rate in the first year, before flattening into a long, gentle tail that can produce for decades. Conventional wells decline more gradually.
This means the monthly check is front-loaded. The economics of a well are often made or broken in the first 18–24 months, after which income settles into a slowly declining stream. Any projection of oil and gas income that does not bend downward over time is, by definition, ignoring the physics. Our Decline Curve Visualizer lets you see exactly how different decline rates reshape the income profile.
Price: the part you don't control
Volume is set by geology and engineering. Price is set by the world. Crude trades against benchmarks like WTI, gas against Henry Hub, and your realized price is the benchmark minus a local differential for quality and transport. Because commodity prices swing widely, and quickly, the same well can generate dramatically different income in different years. A disciplined investor models a range of prices, not a single hopeful number.
How and when you get paid
Before a single dollar flows, you'll sign a division order, a document confirming your exact decimal share of the well's revenue. The operator or a purchaser then pays monthly, usually 30 to 60 days in arrears, by check or ACH. Statements itemize the production volumes, prices, taxes, and (for working interests) expenses, so you can reconcile what you received against what the well actually did.
Revenue statements are dense and not always error-free. Confirm your decimal interest matches your division order, watch for unexpected expense line items, and question deductions you do not recognize. The money you do not check is the money you can lose.
Income from a well is the product of three things, volume, price, and your share, and only the last one is fixed. Respect the other two.