The ink on the oil and gas lease you signed is dry. You’ve received your bonus payment. Now what?
Royalties, of course!
But when will you receive those royalties? I get asked this question all the time. Unfortunately, oil and gas companies don’t publicize when and where they plan on drilling. That being said, you can be assured that you will soon begin to receive royalties if you receive what is called a Division Order in the mail.
What is a Division Order?
A Division Order is typically a one-page document that the oil and gas company asks you to sign to confirm your decimal interest in the production unit or pool of which your acreage is a part. Your decimal interest is the interest in all of the oil and gas that is produced from the unit or pool.
For example, if the unit or pool produces $10,000 worth of oil and gas and your decimal interest is .0025, your share of that $10,000 is $25.00 ($10,000 x .0025 = $25.00).
Confirm your Decimal Interest!
If your decimal interest is incorrect, your royalty payments will be incorrect. That is why it is so important that you confirm your decimal interest! So, how do you do that?
You’ll need the following information:
(1) the amount of acres of your property that is included in the unit or pool;
(2) the total amount of acres in the unit or pool; and
(3) your royalty rate. You can find the first two pieces of information in the oil and gas company’s Declaration of Pooling (or a similarly named document) that is filed in the County Recorder’s office.
Of course, your royalty rate will be in your lease. Once you have that information, confirming your decimal interest is easy.
Decimal Interest Formula
The formula is as follows:
Acres in Unit / Total Acres in Unit x Royalty Rate = Decimal Interest
For example, assume you have 20 acres in a unit and the unit is a total of 400 acres. Also, assume your royalty rate is 18%. Your decimal interest would be 0.009.
20 / 400 x .18 = 0.009
Sometimes, issues arise when royalty owners do not own 100% of the minerals. The minerals may be co-owned by many different people. In that event, the oil and gas company will have run title and have made a determination as to your ownership interest in the minerals. Using the above example, assume that you own a 1/8 or .125 interest in the 20 acres. Your decimal interest would be 1/8 of 0.009 or .00125.
Mistakes Do Happen – Correcting the Division Order
As a courtesy for existing clients, I often review Division Orders, and I do find mistakes. It happens! When it does, it is always, always easier to fix the mistake before signing the Division Order rather than after. Moreover, the oil and gas company may have attributed an ownership interest to you don’t agree with. At that time, it is important that you do not sign anything to ensure you preserve your rights to challenge the oil and gas company’s title opinion.
Read the Fine Print – Confirm Your Decimal Interest
Division Orders also contain language that may amend the terms of your oil and gas lease to favor the oil and gas company. It is very important to make sure you read the Division Orders language and be assured that it does not do so. As I always preach, don’t sign anything you don’t 100% understand!
When you receive a Division Order in the mail, the good news is that you will soon begin receiving those monthly royalty checks. Just don’t get too excited and sign the Division Order without confirming your decimal interest and reading the fine print. It’s worth the time!
GKT offers a wide range of legal services to oil and gas land and mineral owners in Ohio, West Virginia, and Pennsylvania. As always, all consultations are offered on a free, no-obligation basis. If you have an oil and gas issue, call GKT today at (304) 845-9750!
