I moved this post out to this discussion area as there were no replies being generated in the "Division Order" area of this forum.
An oil and gas company sent me a Division Order. I had someone rewrite it and I have some questions for the forum:
How vital is it to get the Property Numbers correct? What about the Property Name? Or if I didn’t have any of those, is my Owner Number sufficient?
For EFFECTIVE DATE, is “Date of First Production” the best for me?
Within the Division Orders there are some interesting differences. Things like where the Oil and Gas Company’s has “casinghead” added seems like it would be a good thing? Whereas under Terms of Sell, they seem to add in a large list of deductions. Can these little changes greatly effect what and how I’m paid or is it simply just more wording? Below has exactly what is written on both:
The beginning line on the Oil and Gas Company’s DO is: “The undersigned severally and not jointly certifies it is the legal Owner of the interest(s) of all the oil (including all the liquid hydrocarbons) and gas (including all casinghead and other gaseous hydrocarbons) produced from the property described on the attached Exhibit A.
Mine says: XXXXXXXX (sometimes referred to herein as “Owner”) claims, but does not warrant, that it is the legal owner of the interest set out below of all the oil and related liquid hydrocarbons produced from the property described below:”
Under “Terms of Sell” the Oil and Gas Company’s Division Order says: “TERMS OF SALE: The undersigned will be paid in accordance with the division of interest(s) set out on the attached Exhibit A. The Payor shall pay all parties pursuant to applicable state statutes regarding accumulation of proceeds and the lease or operating agreement between the parties or any other contract for the purchase of oil and gas. Purchaser shall compute quantity and make corrections for gravity and temperature and make deductions for impurities. Deductions may be made for gathering, transportation, treating, conditions, marketing and other post-production costs downstream of the wellhead and for gross production, severance or other similar taxes on production or the proceeds thereof, as allowed by applicable law.”
Mine was changed to read: “TERMS OF SALE: The undersigned will be paid in accordance with the division of interest set out above. The payor shall pay the Owner at the price provided for by the underlying Oil, Gas and Liquid Hydrocarbon Lease and in accordance with the procedures provided by the underlying Oil, Gas and Liquid Hydrocarbon Lease. Purchaser shall compute quantity and make corrections for gravity and temperature and make deductions for impurities, to the extent same are allowed by the underlying Oil, Gas and Liquid Hydrocarbon Lease.”
Thank you for any help and advice!
What state are your minerals located in? Some mineral owners do not use company-provided Division Orders, and opt to use the NADOA form. Some states do not require a Division Order to be paid royalties.
As far as the property number and property name, I'm not quite sure how the operator is using that, but I would be most concerned with whether the operator has identified your minerals with the correct legal description. Some operators have their own identifiers for leases / wells and owners (unique numbers / names), in addition to traditional legal descriptions. I don't personally care what identifiers they use for their own accounting, as long as the proper legal description and my interest ownership are correctly identified on the Division Order.
I have once seen a Joint Interest Billing statement (for a working interest owner) where the operator did not use commonly accepted identifiers, such as the API number or Texas Railroad Commission Lease ID Number, which I thought was very misleading for the owner I was assisting. The operator was using only their unique identifiers and even used slightly different names for the wells than what was permitted with the Texas RRC. They also did not identify any proper legal description. It truly made me question whether or not the person I was assisting was dealing with a bona fide operator or scam artist.
Generally speaking, a Division Order can not change the terms of a lease but can expand the detail of the lease. The identification of the specific well must conform to the name and number assigned by the RR Commission and/or The API number if used for that well. The decimal interest is a reflection of the size of the producing unit, your legal title in the unit and the royalty rate in the lease. It is the most important number on the DO. Get independent confirmation of that decimal interest.
The deductions are generic to all the payees listed so check the lease language. If you signed a "standard" lease without understanding the deductions allowed by the lease you are stuck with that language. Otherwise, monitor the royalty payments closely for deductions taken generically that are not applicable to your specific lease.
DO payors treat everybody the same through the computer software used by accounts payable. They can't do a special accounting for every payee so its up the the payee to know if he or she is being shorted.
The DO data will go into a computer that has no judgement capabilities. Trust the dealer but always count your cards.
Gary L Hutchinson
Minerals Managment
If you are in Texas, here is the DO form they have to accept for oil sales.
http://www.statutes.legis.state.tx.us/Docs/NR/htm/NR.91.htm#91.402
Kitchen, Gary, and Wade, thank you for replying! The minerals are in Texas.
So I've got to ask, what is the purpose of a Division Order then? If everything should be going off the lease, why add this extra paper work? Can one actually change things via Division Orders? If yes, then shouldn't owners try to get better options then?
Wade- I went to the link you provided. In it, it states " all the oil and related liquid hydrocarbons produced from the property". What about gas or does that fall under "related liquid hydrocarbons"?
Quick question. How do I confirm the decimal interest? In my case, I have never seen the orginal leases. I inherited them. Now a DO has been done, and it has been presented to me for signature. This is for a lateral well. For example, one indicates 76.0956% (5,001 ft/6,572 ft) 0.00104241 Royalty
Texas has set out a statutory form for oil, but not of gas. This was due mainly to the controversy about using the term proceeds. It was assumed that oil would always be sold at market price, but everyone knew that gas was often sold at lower prices. Statute also says that you can use form with similar provisions. The statute does not repeal the Exxon v. Middleton decision which held that the terms of the division order temporarily override the lease terms until repealed by mineral owner. Mineral owners, especially those with cost-free lease language, should add language that lease terms will prevail regarding royalties. Good article by John McFarland, attorney at Graves Dougherty re division orders at:
http://www.oilandgaslawyerblog.com/2011/04/division-orders-what-you-need.html
You should read his various posts on a lot of topics regarding leases and other matters which affect mineral owners.