Limited Partner

Which oil and gas interest gives its owner a share of production revenues without any share of the program's costs, beginning with the first barrel sold?

1. A.A working interest held by a limited partner in the programWrong. Sharing the program's costs is precisely what defines this interest.
2. B.A reversionary working interest retained by the program sponsorWrong. It is cost-free, but nothing is paid on it until investors have recovered their costs.
3. C.An overriding royalty interest carved out of the underlying leaseCorrect. It is cost-free and measured against total production, so it pays from the outset.
4. D.A general partnership interest in the drilling program itselfWrong. A general partner shares costs and, beyond that, carries unlimited liability for the partnership.

Why: The outline defines an overriding royalty interest as one whose owner does not share program costs and who shares in revenues through a cost-free interest in production revenues, payable under an oil and gas lease out of the total production of the well or deposit. Because it is carved out of production rather than out of profit, it pays as soon as the well produces and continues whether or not anyone recovers an outlay. That is what separates it from a reversionary working interest, which is equally cost-free but deferred until investors reach payout. Convert the same interest into a working interest and the owner would begin funding drilling and operating costs from the start.

A limited partnership experiences a triggering event and begins winding down its affairs. Is the partnership immediately terminated at that point?

1. A.Yes, dissolution and termination occur simultaneously, with no period in between.Wrong. Dissolution and termination are not simultaneous; a wind-up period separates the triggering event from the partnership's final termination.
2. B.No -- dissolution begins the wind-up process, and the partnership continues to exist for the limited purpose of liquidating assets and settling obligations until it is finally terminated.Correct. Dissolution begins the wind-up process, during which the partnership continues to exist for the limited purpose of liquidating and settling its affairs.
3. C.Yes, but only if the general partner has already resigned before the triggering event.Wrong. Dissolution and its wind-up process do not depend on the general partner having already resigned before the trigger occurred.
4. D.No, dissolution has no effect on the partnership's existence at all until a court order is obtained.Wrong. Dissolution has an immediate legal effect on the partnership's status; it does not require a separate court order to take effect.

Why: Dissolution is the event that triggers the wind-up process, not the moment the partnership legally ceases to exist. Once dissolved, the partnership continues in existence for the limited purpose of winding up its affairs: liquidating assets, paying creditors, and distributing any remaining proceeds to partners according to the priority set out in the partnership agreement. Only after that process is complete is the partnership actually terminated.

A limited partner in an oil and gas drilling program is told that his units represent a working interest. What obligation does that description carry?

1. A.An obligation to accept unlimited personal liability for the program's debtsWrong. Unlimited liability follows from general partner status, not from the type of interest held.
2. B.An obligation to buy further units if a well has to be deepened or reworkedWrong. Mandatory assessments are a term of a particular program rather than an attribute of the interest.
3. C.An obligation to bear a share of program costs, including the wells that failCorrect. Cost sharing is the defining burden that comes attached to the revenue share.
4. D.An obligation to market his share of production through the operator at posted pricesWrong. Marketing arrangements are contractual and are not what the term denotes.

Why: The outline defines a working interest as an interest in production revenues in which the partners share program costs. Revenue and cost travel together in this interest: the holder funds drilling, completion and operating expenses in proportion to the interest held and receives production revenue in the same proportion. A dry hole is a cost like any other, so a working interest holder pays for the wells that fail as well as the wells that produce. The two cost-free interests, the override and the reversionary working interest, are defined precisely by the absence of this obligation.

A borrower stops paying on a loan held by a mortgage program. What bounds the program's ultimate recovery on that loan?

1. A.The interest that had accrued on the loan before the borrower stopped payingWrong. Accrued interest measures part of what is owed, not what can actually be collected.
2. B.The total capital the limited partners contributed to the programWrong. Investor contributions size the program and say nothing about recovery on any one loan.
3. C.The value realized on the collateral plus any recourse the program has against the borrowerCorrect. A creditor collects out of the security first and out of a personal claim only if it has one.
4. D.The face amount of the loan, collectible in full from the borrower's other assetsWrong. That assumes both full recourse and a solvent borrower, neither of which follows from a default.

Why: The benefit the outline assigns to a mortgage program is predictable income, and the paired risk is default by the borrower. On default the program stops being an income investor and becomes a creditor, and a creditor's recovery is limited by what the security is worth plus whatever personal claim the loan documents give it. Where the loan is nonrecourse, the collateral is the whole of the remedy. That is why the value of the underlying property matters intensely to a mortgage program even though the program never owned the property.