Since the operator gets 1/4 of the upside but the investors bear most of the downside, the operator has a bigger incentive to drill a marginal hole than do the investors. To mitigate the costs of adverse selection and moral hazard, the operator releases information to the investors:
As soon as the well is spudded, the investor will be entitled to receive daily drilling reports to keep him abreast of the well’s progress. Ordinarily, all sophisticated industry working interest partners are responsible for their proportionate part of the drilling costs, regardless of what the operator’s initial cost estimate was or how much money they have prepaid. If the well goes over budget, those partners may be called upon to contribute additional funds to keep the drilling rig going. A partner who fails to respond in a timely manner may forfeit all or part of his interest in the well.