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:
- Receive the division order from the oil and gas company.
- Review and verify the royalty interest decimal.
- 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:
- Verify the legal description is accurate and it matches the description on the lease.
- 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.
- 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.