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 →