Articles Posted in Division Orders

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So you have received a division order, and it says that ABC Oil Company will pay you for a .015625 royalty interest in the Barn Burner Unit #1 Well. How do you know whether the .015625 interest is correct?

I’ve written previously about the purpose and legal effect of division orders, and you can read that post here. The purpose of a division order is to protect the company paying the royalty (“payor”) from double liability. If you sign a division order and it turns out that you should have been paid a larger interest than shown on the division order, the company is protected as long as it paid according to the division order. If you sign a division order and it turns out that your interest is less than the interest shown on the division order, you are legally obligated to pay back the money that you weren’t entitled to.  A payor is legally entitled to require that you sign a division order correctly setting forth your interest as a condition to payment.

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 drillsite, in order to lock up the minerals in that general area so that additional wells can be drilled if the exploratory well is successful. Continue reading →

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Other than the oil and gas lease itself, the division order is undoubtedly the most common legal instrument mineral owners are asked to sign. Mineral owners should know the purpose of a division order, what rights and obligations it imposes on them, and the division order’s relation to the oil and gas lease.

First, I should say that the law and practice regarding division orders varies from state to state. I practice in Texas, so what follows relates only to the use of division orders in Texas.

Historically, there has been much controversy and litigation in Texas about division orders and their effect. As a result, in 1991 the Legislature passed a statute governing the use of division orders. The statute was amended in 1995, 1997 and 1999. It is now Chapter 91, subchapter J of the Texas Natural Resources Code, commonly called the Division Order Statute. So the law applicable to division orders in Texas is the court-made law plus the division order statute.

The main purpose of a division order is to protect the payor of the proceeds of production from double liability. The company issuing the division order is requiring the royalty owner to (1) verify that the royalty owner’s decimal interest set out on the division order is correct and (2) agree that the company can make payments based on that decimal interest until notified by the royalty owner that the ownership has been changed. By the division order, the royalty owner indemnifies the payor against liability to third parties who claim to own the interest being paid to the royalty owner.

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