In this video, we examine the document which divides up the proportional ownership in oil and gas revenue – the division order. We’ll outline the steps you should take when receiving a division order. We’ll also define common elements found on a division order by examining a sample division order.
Covered in this video:
- Define common elements found on a division order.
- Outline steps to take when receiving a division order.
- Calculate decimal interest to verify accuracy on a division order.
- Recognize verbiage which could amend the original lease agreement.
Welcome once again to the Mineral Rights Coach video tutorial series. If you recently received a division order, or are wondering what to expect when you receive your division order, you’re in the right place. In a previous video in this series, Introduction to Mineral Rights Leasing, we covered all the basics of mineral rights leasing, including ownership, the lease agreement, the division order, and the royalty check.
Now we’re going to dig in a little deeper and talk about the document which divides up the proportional ownership in oil and gas revenue – the division order. We’ll outline the steps you should take when receiving a division order.We’ll also define common elements found on a division order by examining a sample division order.
I encourage you to watch the entire video. Near the end, I’ll walk through a simple calculation you can use to calculate your decimal interest – an important verification before you sign your division order. I’ll also describe a disturbing trend in division orders you need to look out for.
Let’s get started.
Put simply, the Division Order divides up the oil and gas revenue among the interest owners.
As a royalty interest owner, you are entitled to a share of what’s produced - whether that be crude oil, natural gas, natural gas liquids, or a combination of these. The Division Order, sometimes referred to as a division of interest, verfies your decimal interest. This in turn determines your monthly royalty income.
There are three essential steps in the division order process:
- receiving the division order
- review & verification
- signing & return
Receive the Division Order
Receiving a division order is a good thing. It means production is starting on your mineral interests and the operator is preparing to distribute a share of the sale revenue to you, the royalty interest owner.
A division order is generally received by a royalty owner through the mail within 3 to 4 months after well completion. Notice there is still a period of time between receiving the division order, and when you receive your first royalty payment.
The division order is prepared by a division order analyst. These individuals are responsible for the proper establishment and maintenance of ownership records. Analysts are generally part of the investor relations or land department in an oil company. As a royalty owner, the Division Order Analyst is the person within the oil company with whom you will have initial contact while finalizing your division order.
The oil company has done some homework prior to sending you a Division Order. Either an in-house attorney or a third party law firm has analyzed the supporting documents relating to the mineral title associated with a producing property. This is generally known as the division order curative process; in other words, curing any defects in title.
Review & Verify
You need to know what to look for when reviewing the division order. The company issuing the division order requires the royalty owner to:
- verify that the royalty owner’s decimal interest stated in the division order is accurate, and
- agree that the company can make payments based on that decimal interest until notified by the royalty owner that the ownership has been changed.
Accuracy is important here – by signing the division order, you release the operator from liability to third parties who claim to own the interest being paid to you as the royalty owner. In other words, if it comes to light that you are being paid more than your fair share, or that you do not in fact own the mineral rights, the third party – perhaps another royalty interest or working interest owner – has the right to pursue you for compensation, with no responsibility on the part of the operator.
This process is not perfect. The best way to balance this process is by knowing what you own. Remember that a title opinion is just that — an opinion. It is prepared by attorneys skilled in examining titles, but it may be wrong. It is based only on the documents provided to the attorney for review. The attorney may not have seen documents that affect the title, or the attorney may have missed provisions in the documents that affect the title.
In mineral rights leasing, it’s always best to take the stance Trust But Verify.
Let’s practice verifying using an example division order. Sections you’ll need to be familiar with include:
- the name of the operating company
- legal description of the producing property
- interest type (royalty interest, working interest, overriding royalty interest). Check out the Types of Ownership video for more on interest types.
- decimal interest
- several legal agreements. At the end of this section, I’ll describe a disturbing trend in division orders attempting to amend the lease agreement. Stay tuned.
What should you do when you receive a division order? The first thing you should do is make sure the description of the property is correct. Next, look over the entire division order, paying close attention to the interest type, decimal interest, and legal agreements. Nearly every oil & gas producing state has statues that spell out what must be contained in a division order before you can be paid.
We’re looking at the Model Form Division Order from the National Association of Division Order Analysts. You can download your own copy of NADOA’s Model Form Division Order by clicking the link below.
If you are unsure about the content of the division order you received, you may compare it to NADOA’s model division order. If you find any differences which you don’t understand, contact the operator, or raise your concerns to an experienced oil and gas attorney. Don’t be bashful about asking questions or making changes. Most companies will take a division order with changes that don’t alter its basic purpose.
A word of caution - A Division Order doesn’t alter the terms of the mineral lease. A Division Order that attempts to amend the terms of the lease is invalid to the extent of the attempted change. There’s a disturbing trend amongst both large and small production companies to amend lease terms with a division order. This may be because your guard is down, as you believe you’ve already agreed to terms in the lease, and are now so close to your first royalty check.
Here’s a common clause prohibiting amending the lease in the division order:
Bottom line – Don’t let your guard down. When in doubt, talk to a qualified oil and gas attorney before signing your division order.
Without a doubt, the most important element to verify on the division order is the decimal interest. Mistakes in the decimal interest can have a profound effect on your royalty income.
There are two formulas you need to be familiar with:
- The first, net mineral interest, is the net mineral acres (acres owned in the spacing unit) divided by gross acres.
- The second, decimal interest, is the net mineral interest times the royalty rate.
Calculations to determine the amount of a royalty check will use the decimal interest.
You’re looking at Exhibit A to the division order. This exhibit lists interest owners in a Harris County, TX well. Notice that Bruce Lomax has a decimal interest of 0.03125, or 3.125%. Let’s take a look at a couple of examples to see how the division order analysts arrived at Bruce’s decimal interest.
Example 1: Bruce Lomax owns 160 net mineral acres in a 640-acre spacing unit with a producing well. Bruce’s net mineral interest then is 160÷640=0.25
Example 2: The royalty rate on Bruce Lomax’s lease is one-eighth, or 12.5% percent. Multiply this percentage by the net interest to find Bruce’s decimal interest. 0.25 x 0.125 = 0.031250. This means that Bruce is entitled to 3.125 percent of the gross value of production from the spacing unit.
Determining decimal interest in this case was a straightforward exercise, but often it is not, especially where pooled units are involved. When companies send out division orders for pooled units, they make little effort to explain how the decimal for payment was arrived at, so the royalty owner may have to call the company to find out how the decimal interest was calculated.
Don’t sign a division order until you know and agree with how the decimal was calculated and are satisfied that the lease is still in effect. It is sometimes hard to get to the right person with the company who can explain it. Usually, the division order or the accompanying letter has a number to call, or the company may have an investor relations hotline that can be found on the website.
Sign & Return
Once you’ve reviewed the division order and verified your decimal interest, you’ll need to complete the necessary fields before sending it back to the operator. This information typically includes:
- your address
- Tax ID or Social Security Number
Of course, Uncle Sam will want his share of your income. In the same way you complete a W-9 for your employer in order to process your paychecks and pay taxes, you’ll need to complete a W-9 form so the operator will know how to tell the government how much they paid you. An oil company will withhold taxes from your share of revenue if you fail to return your W-9.
There isn’t a deadline for returning your division order, but operators will be required to withhold taxes if it isn’t received in a timely manner. Make copies for your records and return the documents as soon as you’ve reviewed and verified the information. Finally, you may wish to have your division order reviewed by an experienced oil and gas attorney before sending.
Once you sign and return your division order, you may begin receiving checks. Don’t hold your breath though. It may take up to six months before receiving your first check. In same cases, it could take longer. One interesting note which may take the sting out of an operator slow to start paying you – if the operator doesn’t pay you within a certain period, the company may be required to pay interest on the money owed. For example, Oklahoma allows six months from the moment of completion to when royalty payments must start, after which a 12% annual interest kicks in on unpaid royalties.
Keep in mind this interest percentage varies from state to state, and not all states are this generous.
I hope this video’s been helpful, and that you have a better understanding of what to do when you receive a division order.
In the next video, we’ll learn how to read your royalty check stub. Accurately reading your check stub is critical because, put simply, it describes how much royalty income you’re receiving.
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