Oklahoma Oil and Gas Division Orders Look Before You Leap

Oklahoma Statute defines a Division Order at 52 O.S. 570.11:  The statutes were renumbered, however, the OSCN Website will automatically aid in research.

A division order is an instrument for the purpose of directing the distribution of proceeds from the sale of oil, gas, casinghead gas or other related hydrocarbons which warrants in writing the division of interest and the name, address and tax identification number of each interest owner with a provision requiring notice of change of ownership. A division order is executed to enable the first purchaser of the production or holder of proceeds to make remittance of proceeds directly to the owners legally entitled thereto and does not relieve the lessee of any liabilities or obligations under the oil and gas lease. Terms of a division order which conflict with the terms of any oil and gas lease are invalid, unless previously agreed to by the affected parties. This subsection shall only apply to division orders executed on or after July 1, 1989.

As one can see from reading the statute, a burden of paying the right person is placed on the operator of the Petroleum Oil Well.  A bit of discussion may shed light on the process of obtaining a division order.

To understand division orders, it is helpful to understand how exploration companies handle royalty payments. When a company decides it wants to drill a well in a particular area, it first hires landmen who investigate the mineral title to the tracts in the area where the well will be drilled and identify the mineral owners of those tracts. The company or its landmen then contact those mineral owners and negotiate oil and gas leases covering their interests. Depending on the complexity of the mineral title, there may be dozens or even hundreds of mineral owners from whom oil and gas leases must be obtained. The company may want to acquire leases in a large area around its proposed drill-site, in order to lock up the minerals in that general area so that additional wells can be drilled if the exploratory well is successful.

After the company has acquired the oil and gas leases in the area it wants to exploit, it picks its initial drillsite and then engages an oil and gas attorney to examine the title to the drillsite tract. The attorney reviews all of the documents gathered by the landmen involving the mineral title to the drillsite tract and then gives an opinion, called adrilling title opinion, to the company. The purpose of the drilling title opinion is to assure the company that it owns oil and gas leases covering 100% of the mineral estate in the drillsite tract. If the drillsite consists of a pooled unit encompassing two or more smaller tracts, the drilling title opinion may cover all of the tracts in the proposed pooled unit. Where the well to be drilled is a horizontal well, the drilling title opinion should cover at least all of the tracts that will be penetrated by the well bore. If the attorney discovers an unleased interest or finds defects in the mineral title that raise questions about the mineral ownership, the company will engage landman to “cure” these title defects prior to the drilling of the well.

Once the drilling title opinion is complete and shows that the company has the drillsite 100% leased, the company drills its well. If it is successful and placed into production, then the company engages an attorney (who may or may not be the same attorney as the one who did the drilling title opinion) to prepare a division order title opinion. The purpose of this second opinion is to tell the company how to pay the royalty owners, based on the record title ownership of the minerals and the oil and gas leases covering the well or pooled unit. The division order title opinion will list each owner of an interest in production and that owner’s decimal interest in production, all of which must add up to 100%. Again, if there are issues regarding the correct ownership of any person, the opinion will discuss those issues and what needs to be done to “cure” the problem. Those issues are listed as “requirements” in the opinion. Where there are requirements, those owners affected by the requirements will not be paid until the requirements are cured.  Remember that a title opinion is just that — an opinion. It is prepared by attorneys skilled in examining titles, but it may be wrong. First, it is based only on the documents provided to the attorney for review. The attorney may not have seen documents that affect the title, or the attorney may have missed provisions in the documents that affect the title.

Based on the division order title opinion, the company then prepares a division order for each owner entitled to payment on production from the well and sends it to the owner. The company personnel who deal with division orders are called division order analysts. When you call a company asking about your royalty payments, you are usually speaking to a division order analyst.  Often, the royalty owner’s receipt of a division order is the first indication to the royalty owner that a well has been completed and is producing. Depending on the complexity of the title, there may be a significant time between the completion of the well and the issuance of division orders – sometimes several months.

Producers and purchasers who pay royalties today generally use division order forms that attempt to comply with the division order statute. The National Association of Division Order Analysts has adopted a form of division order that some companies use. But some companies still try to use division orders to alter the terms of the lease.

So, what should a royalty owner do when he/she receives a division order? First, the owner should determine whether the royalty decimal shown on the division order. Sometimes this is a simple matter, but often it is not, especially where pooled units are involved. When companies send out division orders, they make no attempt to explain how the decimal for payment was arrived at, so the royalty owner may have to call the company to find out how the decimal was calculated. Royalty owners should not be bashful about making such calls. Don’t sign a division order until you know and agree with how the decimal was calculated and are satisfied that the lease is still in effect. It is sometimes hard to get to the right person with the company who can explain it. Usually, the division order or the accompanying letter has a number to call, or the company may have a royalty owner hotline that can be found on its website.

Second, read and understand the language in the division order. If you don’t understand or don’t agree with something, don’t be bashful about asking questions or making changes. Most companies will take a division order with changes that don’t alter its basic purposes.

Third, I recommend that royalty owners always add language to a division order as follows:

THIS INSTRUMENT DOES NOT MODIFY OR AMEND THE TERMS OF ANY OIL AND GAS LEASE. ALL ROYALTIES DUE AND PAYABLE UNDER ANY OIL AND GAS LEASE SHALL BE CALCULATED AND PAID AS PROVIDED IN THE LEASE. THIS DIVISION ORDER IS EXECUTED WITHOUT CONSIDERATION AND MAY BE REVOKED AT ANY TIME.

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This entry was posted in Business Law, Criminal Defense, Oil and Gas Law, OKC Criminal Defense, Real Estate Law and tagged , , , , , . Bookmark the permalink.

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