Division Order

Demystifying Division Orders: The Key to Oil & Gas Revenue Sharing

In the world of oil and gas, the term "Division Order" might seem like a cryptic phrase reserved for industry insiders. However, understanding this document is crucial for anyone involved in the oil and gas industry, from landowners to investors. It's essentially the blueprint for how revenue from a producing well is distributed among the rightful owners.

What is a Division Order?

A Division Order is a legal document that outlines the ownership interests and revenue sharing for a specific oil or gas well. It clarifies the percentages of production that each party is entitled to receive based on their ownership stake in the well. Think of it as a contract that ensures fair distribution of profits.

Why are Division Orders Important?

• Transparency: They provide a clear and verifiable record of ownership and revenue sharing, minimizing disputes and ensuring fairness.
• Financial Accuracy: They are essential for calculating royalties, working interests, and other revenue streams associated with the well.
• Legal Compliance: Division Orders are crucial for adhering to legal requirements and state regulations governing oil and gas production.

Key Interest Owners and Their Revenue Shares:

A typical Division Order lists the following stakeholders and their corresponding revenue shares:

• Landowner: The owner of the mineral rights under the land where the well is located. They receive a royalty, typically a percentage of production, often a 1/8th or a 1/4th interest.
• Working Interest Owner: The party responsible for drilling, operating, and developing the well. They typically have a larger percentage of the production than the landowner.
• Overriding Royalty Owners: Individuals or entities who hold a royalty interest in the production, separate from the landowner's royalty. These rights can be granted through various agreements and may have different percentages.
• Net Profits Interest (NPI) Holders: These individuals receive a portion of the profits generated by the well after operational expenses are deducted. The NPI share is typically calculated as a percentage of the net profits.
• Non-Participating Royalty Owners: These individuals are entitled to a royalty on production but are not obligated to contribute to the costs of development and operation.

Example:

Imagine a well producing 100 barrels of oil per day. The Division Order outlines the following ownership interests:

• Landowner: 1/8th royalty interest (12.5% of production)
• Working Interest Owner: 75% working interest (75% of production)
• Overriding Royalty Owner: 10% overriding royalty interest (10% of production)

The daily revenue distribution would be:

• Landowner: 12.5 barrels of oil
• Working Interest Owner: 75 barrels of oil

• Overriding Royalty Owner: 10 barrels of oil

  Conclusion:

Division Orders are the cornerstone of equitable revenue sharing in the oil and gas industry. Understanding their contents is vital for anyone involved in oil and gas operations. By ensuring transparency and accurately defining ownership interests, Division Orders contribute to the efficient and fair distribution of production revenues, fostering trust and stability in this complex and dynamic industry.