A division order documents the agreement contained in a lease which is a binding contract between a purchaser of oil & gas and the owners of an oil or gas well. It shows a schedule of how much of the revenues go to each owner of the well. Often with mineral and oil rights, a well will be owned by multiple persons or entities. A division order specifically lists each owner of an oil or gas well and how much of the revenues they get from each oil or gas production unit. Division Orders also reflects how much interest the producer gets in percentage of the sale of the hydrocarbon production from the unit. Usually royalties will not be distributed to an owner until that owner has signed the division order.
Before Signing a Division Order
Check the Math. When signing the division order make sure you check the oil and gas companies’ math – you don’t want to sign something that mistakenly gives you less money. You will want to make sure that it reflects what you have negotiated on the lease at the very least:
- The lease term determines how long the lease will run. An oil and gas lease has two different terms, the primary term and the secondary term. The primary term is negotiated upon for a number of years and/or months. The secondary term comes after the primary term. This is for a period of time that fulfills a circumstance. Usually a second term will be stated so long as the land is still producing oil and/or gas. The amount of time for the second term must also be negotiated.
- The royalty rate is also something which is negotiated. The person owning the land (the lessor) receives a royalty interest from the production and revenues made from the leased minerals. You will see most royalties given as a percentage of the revenues. Most lessors get a negotiated royalty interest rate between 12.5% to 25% of the revenues.
- Sometimes a bonus is added to a contract. This is also quite negotiable and can be a lump sum but is seen more as a bonus per mineral acre of mineral land owned.
- A delay rental agreement can also be negotiated on. If the lessee (the oil company) doesn’t produce oil on your land then you can get a delay rental payment. The terms are usually expressed that if there is no production done by the lessee, then they will pay you money per year during the primary term to keep the contract active.
- Also negotiate on a “shut-in royalty”. A shut-in royalty is when the lessee (the oil company) pays the lessor (the lease owner) a royalty at a negotiated rate per acre, while the well is not producing oil or gas.
Read the Lease Carefully
You want to make sure that everything that was negotiated is reflected in the division order. If the division order does not reflect the negotiated terms of your lease you will want to check to make sure that the company doesn’t attempt to remove negotiated protections of your ownership interest. Potential lessors will want to make sure that any changes are looked over by a mineral rights expert, acknowledged, and possibly negotiated, before signing the finalized contract.
Seek Legal Advice for the Lease which determines the content of the Division Order
An oil and gas attorney is always your best bet when it comes to a signing a lease before getting a division order to sign. To make sure that your interests are protected you should consider consulting an attorney. Your attorney will be able to tell if everything is in order.