A division order is a binding contract between a purchaser of oil & gas and the owners of an oil well. It shows a schedule of how much of the oil revenues go to each owner of the well. Often in mineral and oil rights cases, 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 record how much money the producer gets in revenue for the sale of oil as well. Usually royalties will not be distributed to an owner if that owner has not signed the division order.
Before Signing a Division Order
Check the Math. When signing the contract, 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 you have negotiated on the following terms of the contract-to-be at the very least:
- The lease term should be negotiated upon. How long will the lease run for? 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 you should negotiate on. 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 land owner) a royalty at a negotiated rate per acre, while the well is not producing oil or gas.
Read the Contract Carefully
You want to make sure that everything that was negotiated is in the document. If the division order is being re-negotiated you 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 potential changes are looked over by a mineral rights expert, acknowledged, and possibly negotiated, before signing the finalized contract.
Seek Legal Advice on the Division Order
An oil and gas attorney is always your best bet when it comes to a division order contract. To make sure that your interests are protected you should not attempt to sign a division order without consulting an attorney. Your attorney will be able to tell if everything is in order. At San Saba, we retain veteran attorneys who have built their careers in the oil industry helping lessors, so trust in our experienced counsel to fight for your best interests.