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April 30, 2011

DIVISION ORDERS: WHAT YOU NEED TO KNOW

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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