Oil & Gas Division Orders

February 10, 2021

LandGate is a marketplace for mineral, solar, wind, and other property rights. But we also spend a lot of time on the phone answering questions. Last week I spoke to Gerald from Houston, TX. Gerald received a Division Order in the mail. It was sent from an oil and gas company that operates gas wells in East Texas. I told him I am familiar with Harrison County drilling activity as well as the operator. Gerald had a lot of questions, and rightfully so. It is important to understand what a Division Order is, why you received it and what happens after you sign it.

WHAT IS A DIVISION ORDER?

A Division Order is an agreement entered into between the operator (or the company purchasing the production from the operator) and the royalty owner, whereby they will agree on the decimal interest owned by the royalty owner in a producing well.

See a sample Division Order.

WHY DID I RECEIVE A DIVISION ORDER?

You received the Division Order because a well was successfully drilled. The oil or gas and possible natural gas liquids are now being produced and sold. Your royalty interest is likely the result of an oil and gas lease you or a relative signed. The lease allowed the operator to drill a well. The lease also provided for an oil & gas royalty to be paid to you. A royalty is a percentage of the proceeds from the sale of production, which is paid monthly to the mineral owners.

AM I REQUIRED TO SIGN THE DIVISION ORDER?

No. But you will not receive your monthly mineral royalty payments until after you sign and return it.

HOW WILL I KNOW IF MY MINERAL INTEREST IS CORRECT?

Most people receiving a Division Order do not know if their decimal interest is accurate but will assume the company preparing the Division Order did it correctly, which is a good assumption. Usually, the Division Order will be attached to a cover letter. And there is a good chance the cover letter contains contact information in case you have questions. If you call the company, you should ask to speak to a Division Order Analyst.

The decimal interest can be a difficult number to calculate. The following information is required to make the calculation:

How many net mineral acres do you own? For example, if you own a 20% mineral interest in an 80 acre tract, you own 16 net mineral acres.
How many acres are allocated to the producing well? If it is a producing gas well that requires 640 acres to be allocated to it, the operator likely formed a unit that included your 80 acre tract. If the unit covers 640 acres and your tract covers 80 acres, then your tract participation factor is 12.5% (80/640)
What is the royalty rate that was reserved in the oil and gas lease that covers your 80 acre tract?

WHAT IF I DISAGREE WITH THE DECIMAL INTEREST?

DO NOT sign the Division Order if you do not understand it or do not agree with your decimal interest. Call the operator first. If you are still uncertain, call LandGate.

HOW DOES THE OPERATOR KNOW WHO TO PAY?

Prior to drilling the well, the operator will send landmen to the county courthouse to research the mineral ownership of the tracts they want to drill on as well as all the offsetting tracts that might be proven productive if the initial well is successful. Landmen will then contact mineral owners and negotiate oil and gas leases.

Once the drillsite tract is selected, all the courthouse title documents covering that tract which were collected by the landman will be handed over to attorneys. The attorneys will review the documents and prepare a Drillsite Title Opinion. The purpose of the Drillsite Title Opinion is to make certain that they have leased 100% of the minerals under the drillsite tract. The operator is preparing to spend millions of dollars on the initial well and need to make certain there is no unleased interest.

If the well is successful, the operator will then request the attorneys to prepare a Division Order Title Opinion. The purpose of the Division Order Title Opinion is to make certain they know who needs to be paid and their decimal interest. And with this information, Division Orders will be prepared and sent to all royalty owners.

IRS FORM W-9

You can also expect to receive an IRS Form W-9 with your Division Order. Your tax advisor can go into more detail, but the operator has to report your royalty payments to the IRS. The completed W-9 will give them all the personal identification information they need.

See a sample IRS Form W-9.

If you are receiving a royalty payment each month and curious what a buyer would be willing to pay you for your interest, call LandGate. Or let us know if you have received a Division Order and need help understanding it. Give us a call. We look forward to answering your questions.