Mineral owners across the country receive Division Orders in the mail from oil and gas companies regularly, but many are unaware of what a Division Order entails. It is important to understand what a Division Order is, why you received it, and what happens after you sign it.
Key Takeaways:
A Division Order is an agreement between the operator and the royalty owner, detailing the decimal interest owned by the royalty owner in a producing well.
Purpose: It confirms the royalty owner's share of proceeds from the sale of production, which is paid monthly.
Receipt of Division Order: Issued when a well is successfully drilled and production begins, based on an oil and gas lease agreement.
Signing Requirement: Signing is not mandatory, but royalty payments are withheld until the Division Order is signed and returned.
Accuracy of Decimal Interest: Owners should verify their decimal interest, which is calculated based on net mineral acres, allocated acres, and royalty rate.
Disagreement with Decimal Interest: Owners should not sign if they disagree with the decimal interest and should contact the operator for clarification.
Payment Process: Operators conduct thorough research and legal reviews to ensure correct payment distribution to royalty owners.
IRS Form W-9: Accompanies the Division Order for tax reporting purposes, requiring completion of personal identification information.
Additional Resources: LandGate offers tools for generating property reports and creating listings for those interested in selling their mineral interests.
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. A royalty payment is a percentage of proceeds from the sale of production from a producing well.
Why did I receive a Division Order?
You received the Division Order because a well was successfully drilled. The oil or gas and possibly 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, you are not required to sign the division order. However, you will not receive your monthly oil and gas royalty payments until after you sign and return it.
How can I tell 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!
How does the operator know who to pay?
Prior to drilling the well, the operator will send a landman 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. A landman is the public-facing side of an oil, gas, and mineral exploration team. They interact and negotiate directly with landowners to acquire leases for oil & gas drilling.
Once the drill site 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 Drill Site 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, generate your free property report on LandGate's map and create your free listing today:
