A division order is a document and a means of confirming ownership of a well or multiple wells. Generally, oil and gas companies send these ownership documents to the new well owners. As a mineral owner, it’s a great thing to receive a division order.
It signifies that your property has started production, and it’s time for you to reap the benefits of your investments. Generally, the production will include minerals like crude oil, natural gas, and other hydrocarbons.
The mineral rights owner receives a division order, and it takes about three to four months after the well has been completed. However, due to a lack of knowledge, property owners are often confused about dealing with an oil and gas division order.
So, we will look at the essentials to know while dealing with such documents to prepare you for receiving them.
What is on an Oil and Gas Division Order?
A division order mentions the owner’s name, address, and a contact section where the owner must provide the contact details, Tax ID, or a Social Security Number. It also mentions the name of the well, location, type of interest, owned decimal interest for the property’s production, and the production itself.
What to Ensure While Reading a Division Order?
As an owner, it is important to go through the division order and verify the critical details for accuracy. So, make sure that your contact details, SSN or TIN are there. Then, once you have verified the information in the document, you can return it to the oil and gas company.
If you find that the details are incorrect, cross the section, handwrite the correct details in the form, and send it back. At times, you may not agree with the information presented in the document. You can contact the oil and gas company to resolve the matter in such a case.
Advantages of a Division Order
Generally, an oil production site is owned by multiple owners through a mineral deed. A well can have hundreds of owners where every owner may have a different or equal proportion of the well’s production.
Therefore, when production starts, the oil companies need to divide the revenue according to the property owned by individuals. This is where a division order comes in handy.
It can be tedious for oil and gas companies to decide which owner gets what portion of the revenue without a division order. So, it’s a win-win situation for every kind of interest owner. With a division order in place, the operator or the first purchaser and the royalty owner decide through an agreement the decimal interest for the well, production unit, lease, or the field-wide unit.
So, at the time of distribution, every owner is aware of the portion they can receive. Moreover, when the portions are communicated, companies must pay the right amount to all the parties.
Division Order and Mineral Lease
A division order doesn’t change any terms mentioned in the mineral lease. So, if you come across a division order that attempts to alter a mineral lease terms, it will be invalid to the extent of attempted alteration.
But at the same time, it is important to note that the operators may attempt a change in the lease through negotiations. Generally, such attempts are made before the revenue is distributed. Therefore, when you receive a division order, it is critical to ensure that you carefully review any other documents related to it during the same time.
When Do You Receive the Funds?
The suspended funds are released when the mineral rights owner receives the documents. However, if the owner’s lease suggests that there is no need for a signed division order before the payment, the funds are released without any reception from the owner.
But it is mandatory to present the SSN or TIN. According to federal law, failure to provide any of these will prompt a 24% withholding tax which is nonrefundable.
What is Decimal interest?
Decimal interest is a term that signifies the revenue share of each owner. The oil and gas division order is based on each well’s calculations and the interest applicable to each party. So, technically, it’s the decimal interest.
How is Decimal Interest Calculated?
To calculate the decimal interest, the oil and gas company will divide the total acres a party owns in a unit by the total acres covered by the unit. Then this number is multiplied with the royalty percentage mentioned in the lease.
Let’s take an example where a landowner has a 20% royalty agreement and owns 100 acres of land in a 500-acre production unit. His decimal interest will be equal to 0.04.
So, if a well has a production of $1,000,000, the landowner will be eligible for an amount of $40,000. It gets more interesting with the increase in the number of wells. For instance, if there are five wells with the same production, the landowner gets a hefty $240,000 return from his owned property in that unit.
Since the division order binds the companies to pay these amounts to the property owners, more transparency and legal obligation are attached to the process. Therefore, it’s certain that every party would get its deserving share.
Division orders are documents that ensure transparent and proportional distribution of mineral revenue generated by the oil and gas companies. This is a vital document for those who have little understanding of oil and gas-related property matters.
Moreover, the document protects the property owners under the law, which motivates new investors to take up mineral properties and generate hefty amounts. So, once you receive a division order, all you need is to submit the order in time after verifying the details. If you fail to send it within time, you might be fined with a withholding tax.