Division Order

Four Key Pieces of Correspondence for the Oklahoma Mineral Owner

(This post originally appeared on www.oklahomaminerals.com on November 8,2016)

All,

Landmen are no busier than most professionals during the work day, but it is often stated that company landmen never return the calls of mineral owners. While this might be true of the bottom 10% of the profession, most landmen know that by placing a single call to a mineral owner, he could spend 30 minutes explaining knowledge that could easily be obtained throughsimple internet research. An informed mineral owner, who asks a poignant question, is much more likely to receive the answer he needs than the owner who calls to ask the difference between a spacing application and a well proposal.

Admittedly, if one owns a single tract of minerals or maybe just inherited the minerals, then the inaugural process of leasing and receiving the regulatory paperwork while the company is assembling the drilling and spacing unit would surely baffle most.

In general, there are four key pieces of correspondence that an Oklahoma mineral owner will receive from the landman. These occasions are detailed in brief below.

The Offer to Lease

Often, the first time an Oklahoma mineral owner will be contacted by a landman is when the landman’s company is assembling a prospect. The mineral owner will be contacted by phone and/or mail with an offer to lease their mineral interest. Most landmen will offer at least two options which will differ in the amount of cash bonus per net mineral acre and the royalty.

The Well Proposal

After the landman has made a bona fide effort to reach an agreement with all owners who own the right to drill a well in the proposed unit, he will send a well proposal to the parties with whom he has not yet reached an agreement. The well proposal will offer final terms in lieu of participation in the well and details of the well to be drilled such as location, proposed depth, target formation, estimated depth and cost of the well in the event the party would like to participate. It is important to note that in Oklahoma, an election to participate in the well is not binding until the party elects under the pooling order.

Oklahoma Corporation Commission Applications

Initially one of the most confusing aspects of being an Oklahoma mineral owner is the receipt of Oklahoma Corporation Commission (“OCC”) applications and orders. Some owners ask why they are being sued and others ask to be removed from the mailing list. Owners receive the applications and orders because Operators and applicants are required by law to provide notice of their activities to the owners who their activity affects. These applications are orders are mailed from an attorney who represents the applicant in OCC matters. The three most common applications that an owner will receive are the spacing application, location exception application, and pooling application. These applications will be discussed in detail at a later date, but the pooling application will be the application that will have the largest effect on the mineral owner’s rights and pocketbook. The OCC publishes a handbook for mineral owners that can be found http://www.occeweb.com/og/PubAsst/WebRoyaltyOwnersHandbook3-2015.pdf

The Division Order

If an operator successfully drills and completes a well, the next correspondence the mineral owner will receive from the company is the division order. A division order is an instrument which sets forth the proportional ownership in the produced hydrocarbons. The proportional ownership is communicated to the owner on the instrument in a decimal form. After the division order is signed and curative title issues are completed, the mineral owner should receive their first check within six months from the date of first production from the well.

In conclusion, the four key pieces of correspondence that an Oklahoma mineral owner will receive from the landman and the company, are the offer to lease, the well proposal, Oklahoma Corporation Commission applications and orders and finally, the division order. All four of these topics will be expanded upon in future articles. If there are any other topics you would like to discuss, please mention your ideas in the comment section.

More to follow,

Berlin

The Division Order

After the Oil and Gas Lease, the Division Order is the second most common instrument the Oklahoma oil and gas mineral and royalty interest owner will be exposed to. Like the oil and gas lease, the division order has a lotta ins, a lotta outs, a lotta what-have-yous, but we will focus on the basics for this post.

The purpose of the division order is to divide the revenues from a producing oil and gas well proportionally among those entitled to revenue in the well. A description of how those parties came to own a revenue interest can be found here.  The division order specifies the division of interest from the well. The decimals described in the division of interest are used to determine the percentage of the monthly revenues owed to the interest owner which equate directly to the royalty check.

There are three steps in the division order process:

  1. Receive the division order from the oil and gas company.
  2. Review and verify the royalty interest decimal.
  3. Sign (execute) the division order.

Not all Oklahoma mineral owners will have a well drilled on their mineral rights, so to receive a division order is a wonderful thing. It means that millions of years ago the dinosaurs died in the little square under their family farm and the oil company's geologist was competent enough to find them. It also means that the well is producing in paying quantities and the oil company is almost ready to distribute the first revenues from the well. 

The oil company has determined the percentage of ownership through a document called the Division Order Title Opinion. A Division Order Title Opinion is prepared by an attorney who specializes in title ownership. He will check every document in the county courthouse from the beginning to present day.

Review and Verify

It is necessary to know what to look for when reviewing the division order. The company issuing the division order requires the royalty owner to take the following two actions:

  1. Verify the legal description is accurate and it matches the description on the lease.
  2. Verify that the royalty owner’s decimal interest stated in the division order is accurate and there are two formulas needed for this task:
    • Net Mineral Interest equals the net mineral acres in the spacing unit divided by the gross acres in the spacing unit. For example, if James, from Enid, owns 160 net mineral acres in a 640 acre section, then his net mineral interest is 0.25 or (160/640=.25)
    • The Decimal Interest, equals the net mineral interest multiplied by the royalty rate. If James, from Enid, agreed to a lease with a 3/16th royalty, his decimal interest would be 0.046875 or (160/640)*(3/16).
    • All of the owners' decimals will add up to 1.00000000 after the interests are accounted for under the DOTO.
  3. Agree that the oil company can make payments based on that certain decimal interest specified on the division order until notified by the royalty owner that the ownership has been changed.

By signing the division order, the mineral owner releases the operator from liability to third parties who claim to own the interest being paid to you as the royalty owner. This means that if a owner is being paid more than his fair share another owner has the right to pursue him for compensation, with no responsibility on the part of the operator. Yes, you read that correctly, the mineral owner can be held liable even if the mistake was originally made by the title attorney in preparation of the DOTO or the oil company who used the DOTO.

 

Sign (Execute) and Return

Once the mineral owner has reviewed the division order and verified his decimal interest, send it it back to the operator. It may take up to six months before a check from the oil company. The State of Oklahoma allows operators six months from completing a well to when royalty payments must start being paid to mineral owners after which a 12% annual interest must be paid on unpaid royalties.

If there is any confusion, please seek the counsel of an experienced oil and gas attorney. While he might charge a few hundred dollars for his services, an error in a division order or DOTO could cost the mineral owner many times that over the life of a well.

More to follow.

BR